Charitable Trusts: Are They The Right Choice for Your Legacy?

Thoughtful charitable giving and estate planning requires a decision on what type of legal structure to put in place to manage your giving in the present and on into the future. An irrevocable charitable trust may prove to be an ideal device. Understanding the benefits they offer and the differences between the two main types are an important part of the decision-making process.

Which charitable trust is right for you?

The Benefits of Charitable Trusts

Charitable trusts provide several benefits including:

• Income Tax Deduction: An immediate partial income tax deduction is available for the estimated value of the charitable contribution.

• Capital Gains Tax Avoidance: Funding the trust with highly appreciated assets such as closely held stock or real estate allows the donor to sell those assets without incurring any capital gains tax to the trust.

• Estate Tax: Assets held within a charitable trust are removed from your taxable estate thereby reducing or removing estate taxes from your heirs.

• Lasting Legacy: A charitable trust can help ensure your legacy of giving will continue into the future, allowing your favorite causes to be supported.

• Income Stream: A trust can provide an income stream for you, or your heirs for a set term of years or life.

Income Now  … or Income Later?

The two primary types of charitable trusts are differentiated by who receives income first from the trust.

Charitable Remainder Trust (CRT)

This trust provides income first, with the remainder of the assets going to charity.

How It Works:

1. You transfer assets into the trust.

2. The trust pays an income stream to you or other non-charitable beneficiaries ( such as your heirs) for either a specific time span or for life.

3. When the time span( or life) ends, the remaining assets in the trust are given to charity.

The two types of CRTs are:

Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount each year. This payment remains the same regardless of the trust's investment performance, and you generally cannot make additional contributions.

Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust's value, which is revalued annually. This means your payments will fluctuate with the trust's performance, and you can usually make additional contributions. 

Charitable Lead Trust (CLT)

A CLT is the opposite of the CRT, with the charity receiving income from the trust first, with the remainder passing to you or your heirs.

How It Works:

1.        You transfer assets into the trust.

2.        The trust pays an income stream to the charity for a set number of years.

3.        When the time span ends, the remaining assets in the trust are paid to you or your heirs.

CLTs are often used to transfer wealth to heirs with significantly reduced gift and estate taxes, as the value of the charity's income interest is deducted from the taxable transfer.

Similar to CRTs, there are two types of CLTs. The payout structure is identical :

Charitable Lead Annuity Trust (CLAT): Pays a fixed dollar amount each year to the charity. This payment remains the same regardless of the trust's investment performance, and you generally cannot make additional contributions.

Charitable Lead Unitrust (CLUT): Pays a fixed percentage of the trust's value to the charity each year, which is revalued annually. This means the payments will fluctuate with the trust's performance, and you can usually make additional contributions.

Which Trust is Right for You?

Choosing the right charitable trust( and layering in advanced strategies like combining it with a donor advised fund) can be a complex financial decision.

You're balancing multiple high-stakes questions:

• Tax Impact: Which option provides the greatest immediate and long-term tax benefits?

• Giving Legacy: How can you ensure your charitable intentions are carried out effectively and endure over time?

• Income Priorities: Is receiving Income Now more critical, or is maximizing the Income Later for your heirs the main objective?

Generosity Nexus specializes in guiding you through these precise decision points to help you choose the best philanthropic and financial route.

Don’t hesitate to schedule an appointment to learn more about how we can help you.