Guide to Charitable Trusts
A charitable trust allows you to support charitable causes while also providing financial benefits to you, your family, or other beneficiaries. Depending on how the trust is structured, the charity or your chosen beneficiaries may receive payments first, while the remaining assets ultimately pass to the other designated party.
Two primary structures used for these purposes are the charitable lead trust and charitable remainder trust. These trusts generally split the assets between two types of beneficiaries: charitable and non-charitable. The differences involve who benefits first and how the assets are ultimately distributed.
If you’d like to incorporate charitable giving into your estate plan, a charitable trust may be appropriate. At Evans & Davis, our estate planning attorneys can explain how charitable trusts work, determine which structure works best for you, and draft a plan that achieves your charitable giving and estate planning goals.
“A charitable gift can be structured to benefit your family, a charity, or both over time.”
Types of Charitable Trusts
Charitable lead trusts and charitable remainder trusts can both benefit charitable organizations and noncharitable beneficiaries, but they accomplish those goals in opposite orders.
Charitable Lead Trust
A charitable lead trust, or CLT, provides payments to one or more charitable organizations for a designated period. When that charitable term ends, the remaining assets in the trust generally pass to family members or other beneficiaries designated at the time the trust was created.
This arrangement may appeal to individuals who want to make charitable giving a focused part of a broader wealth-transfer strategy. The charity benefits first, while the trust preserves the possibility of passing the remaining assets, including potential appreciation, to the next generation.
Charitable Remainder Trust
A charitable remainder trust, or CRT, reverses the order. The trust makes payments to the donor or other designated beneficiaries for a specified period, and the remaining trust assets ultimately pass to one or more qualifying charitable organizations.
This arrangement may appeal to individuals who want to support charity while continuing to receive payments from the assets they contribute. CRTs can also be useful for people with appreciated assets, such as stocks or real estate, who want to incorporate those assets into their charitable and financial plans. You or your chosen beneficiaries benefit first, while the charity ultimately receives the remaining assets.
| Feature | Charitable Lead Trust (CLT) | Charitable Remainder Trust (CRT) |
|---|---|---|
| Who Receives Payments First? | One or more charitable organizations | Donor or other designated beneficiaries |
| Who Receives the Remainder? | Family members or other designated beneficiaries | One or more charitable organizations |
| Primary Planning Focus | Support charity first, while planning to transfer remaining wealth to other beneficiaries | Provide payments to the donor or other beneficiaries before leaving the remainder to charity |
| Common Structures | Charitable Lead Annuity Trust (CLAT) or Charitable Lead Unitrust (CLUT) | Charitable Remainder Annuity Trust (CRAT) or Charitable Remainder Unitrust (CRUT) |
How Do You Choose Between a CLT and CRT?
The choice between a CLT and CRT depends on what you want the trust to accomplish. Both combine charitable giving with providing benefits to your designated beneficiaries, but the timing and ultimate recipient of the assets differ.
A CLT may be a better fit when your priority is supporting charity now while preserving the remaining assets for family members or other beneficiaries later. A CRT may be more appropriate when you or another beneficiary needs a current income stream from the trust, and you want the remaining assets to eventually support charities.
Your income needs, the assets you plan to contribute, your family’s financial goals, and your charitable priorities can all influence which structure makes sense.
What Assets Can You Use for Charitable Giving?
The assets you choose for a charitable gift can be just as important as the amount you give. Different assets carry different tax, valuation, liquidity, and administrative considerations, making some better suited to particular charitable-planning strategies than others.
Assets commonly included in a charitable giving plan include:
- Appreciated stock: Publicly traded securities that have increased significantly in value may provide charitable and tax-planning opportunities without requiring you to sell the stock personally first.
- Real estate: Appreciated or income-producing real property may be appropriate in some charitable plans, although valuation, debt, liquidity, and management considerations require careful review.
- Business interests: Interests in privately held businesses may sometimes be used for charitable planning, but restrictions on transfer, valuation requirements, and potential transactions involving the business can make advance planning particularly important.
- Cash: Cash remains one of the simplest assets to give, although it may not provide the same planning opportunities as certain appreciated assets.
Retirement assets can also play an important role in charitable giving, but they require different planning than assets such as stock, real estate, or cash. Rather than assuming a retirement account should be transferred directly to a charitable trust, it is important to consider strategies specifically designed for these accounts.
What Are the Benefits of Charitable Trusts?
A charitable trust can do more than facilitate a gift to an organization you care about. When thoughtfully incorporated into an estate plan, it can help coordinate philanthropy with family, financial, and tax-planning goals.
Potential benefits may include:
- Support meaningful causes: A charitable trust can provide structured support to charitable organizations as part of a long-term giving strategy.
- Plan for family and charity together: Rather than treating philanthropy and family wealth planning as separate decisions, a charitable trust can coordinate them within a single strategy.
- Create potential tax advantages: Depending on the type of trust and its structure, charitable planning may provide income, gift, or estate tax benefits.
The benefits available to you depend on the trust structure, assets involved, applicable tax rules, and your individual circumstances.
Attorney Tips for Charitable Giving
The tax advantages associated with charitable planning can be valuable, but taxes should not be the only factor driving the decision. Effective charitable planning begins with understanding what you want your generosity to accomplish and then building a strategy around those priorities.
The attorneys at Evans & Davis recommend considering several aspects of your plan before making a significant charitable gift.
Start With Your Goals
“Charitable planning should begin with the client’s values, not with a particular tax strategy.”
Before deciding how to give, consider why you want to give. Identify the organizations, causes, and communities that matter to you and how you can best meet their needs. This can help you decide not only where your assets go but also the structure and timing of your gifts.
Beginning with those priorities allows the legal and tax strategy to support your charitable intentions rather than allowing potential tax benefits to define them.
Coordinate Giving With Your Estate Plan
“Coordinate charitable giving with your overall estate plan to ensure your generosity fits your family’s financial needs and long-term goals.”
A significant charitable gift can limit the assets available to you and your family, making it important to consider philanthropy as part of your broader estate plan.
Coordinating these decisions can help you determine how much you are comfortable giving, when the gift should occur, and how charitable goals can coexist with providing for a spouse, children, grandchildren, or other beneficiaries.
Work With Your Advisors
“Speak with your CPA and financial advisor before executing any formal gifting.”
Charitable planning often involves overlapping legal, tax, investment, and financial considerations. Your estate-planning attorney can help structure the gift within your broader plan, while a certified public accountant can evaluate the tax consequences, and a financial advisor can assess how the transfer may affect your investments and long-term financial needs.
Bringing these professionals into the conversation before completing a significant gift can help ensure each part of the strategy works well together.
Review Your Plan Over Time
“Reviewing your charitable plan regularly ensures it continues to reflect your financial circumstances, tax considerations, and philanthropic goals.”
The charitable strategy that works for you today may not remain the best approach indefinitely. Your assets, family circumstances, tax considerations, and philanthropic priorities can all change over time.
Regularly reviewing and updating your estate plan provides an opportunity to determine whether your charitable plan still reflects those circumstances and make adjustments when your broader goals evolve.
Ready To Explore Your Charitable Giving Options?
Choosing how to support the causes you care about involves more than selecting a charitable organization. The timing of your gift, the assets you use, your family’s needs, and the legacy you hope to leave can all influence which strategy makes sense.
At Evans & Davis, we help clients bring those considerations together. Whether you are exploring a charitable lead trust, charitable remainder trust, or another giving strategy, our attorneys can help you evaluate your options and develop a plan that reflects both your philanthropic priorities and your family’s long-term needs.
Call 866-708-2335 or contact us online to discuss how to best integrate charitable giving into your estate plan.