This article is going to explore two different types of trusts that we utilize with our clients in planning for income taxes and estate taxes.  These two trusts are the Charitable Remainder Trust and the Charitable Lead Trust.  Both trusts are considered “split-interest” trusts because the assets of the trust, and the trust income, are split amongst different beneficiaries.

Charitable Remainder Trust

A charitable remainder trust or CRT is an irrevocable trust that lets you donate assets to charity and draw annual income for life or for a specific period. Charitable remainder trusts are great in many ways. These trusts are designed to reduce the income tax liability of the donor. They work by taking the original donation from the trustor (the one who sets up the trust and makes the donations), then they dispense percentages of the money to one or two places. The places the money can be dispensed are back to the trustor, or to another non-charitable beneficiary. After the life of the trust is over, the remaining assets are donated to charitable beneficiaries. Charitable remainder trusts have a specific term of 20 years or the life of one or more beneficiaries. Some of the benefits of a charitable remainder trust are listed below:

  • Provide income tax deduction on initial donation.
  • Removes asset from estate- no longer subject to estate taxes.
  • It can significantly mitigate capital gain taxes on highly appreciated assets if those assets are used as part of the trust donation.
  • Provides Income to you for a specified period, often at a lower long-term capital gains rate.

Charitable Lead Trust

A charitable lead trust, or CLT for short, annually pays a fixed annuity or unitrust amount to a charitable organization for the lead period.  This is the time period specified in the trust instrument. Once the trust period is over then the remainder amount is dispensed back to the trustor or other assigned beneficiaries. The lead period may be a term of years. It may also be a period determined by the lifetime of one or more individuals. A charitable lead trust is a close inverse of a charitable remainder trust. One of the main differences is that a CLT is not subject to the 20 year time limit.

How Can They Help Me Save On Taxes

Both trusts offer great advantages when it comes to income and estate taxes. Now that we know how they both work we can understand how they offer advantages. A CRT is great for tax purposes because the initial contribution of typically highly appreciated property provides a tax deductible charitable contribution. The income distributed to the trustor is typically taxed at the lower long-term capital gains rate. At the end of the trust’s term the remaining assets (typically stocks and bonds) are provided to the charity.

As it relates to the CLT, the trustor also receives a chartable tax deduction when the trust is established. During the specified period the trust makes payments to the charity of the trustor’s choice.  At the end of the trust’s term the remaining assets (typically stocks and bonds) are provided back to the trustor or the beneficiaries of their choice. Families typically use this as a vehicle to fund charitable intentions during their lifetime. Then the remaining assets go back to their beneficiaries upon their death or specific term of the trust.


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