Estate Planning 101 Charitable Trusts – A Great Estate Planning Tool!

A charitable trust is an irrevocable trust that allows a grantor to accomplish their philanthropic objectives while providing benefits to both charitable organizations and non-charitable organization beneficiaries. There are different types of charitable trusts such as, Charitable Remainder Annuity Trusts (CRATs), Charitable Lead Annuity Trusts (CLATs), Charitable Remainder Unitrust (CRUTs), and Charitable Lead Unitrusts (CLUTs). With each trust, a grantor can contribute highly appreciated assets such as stocks, non-publicly traded assets and real estate to obtain a tax deduction while providing gifts to charitable organizations and family members. This estate planning technique can also provide immediate income tax and estate tax benefits.

A description of the aforementioned trusts are provided below:

Charitable Remainder Annuity Trusts (CRATs)
CRATs provide fixed annuity payments to a beneficiary with the remainder of the trust assets passing to a charitable organization. For instance, a grantor can name themselves or another beneficiary as the recipient of the annuity payments for a term which can be no more than the greater of either, 20 years or remainder of the grantor’s life. The annuity payments can be no less than 5% but no more than 50% of the value of the trust’s assets at the time the trust was established. When a grantor funds a CRAT, the grantor is entitled to a tax deduction. Additionally, investment income from CRATs are tax exempt which makes it a great tool for asset diversification, however, the grantor is prohibited from making additional contributions of assets to the trust.

Charitable Remainder Unitrusts (CRUTs)
CRUTs are similar to CRATs, however, the annuity payments are based on a fixed percentage of the value of the trust assets determined annually. Like CRATs, the grantor or a member of the grantor’s family can be designated as the remainder beneficiary of the trust and the grantor is able to make additional asset contributions to the trust during the grantor’s life.

Charitable Lead Annuity Trusts (CLATs)
CLATs are the reverse of CRATs whereby the annuity payments are made to a charitable organization for a term and upon expiration of that term the grantor’s beneficiaries receive the remainder of the trust assets. Generally, the grantor receives an income tax deduction based on the value of the trust assets transferred to the charitable organization. With CLATs, there is no gift or estate tax inclusion when the trust assets are transferred to a non-charitable organization beneficiary, however, unlike CRUTs and CRATs, income from the trust is not tax exempt.

Charitable Lead Unitrusts (CLUTs)
CLUTs are the reverse of CRUTs whereby the annuity payments are based on a fixed percentage of the value of the trust assets are made to a charitable organization for a term and the grantor’s beneficiaries receive the trust assets upon expiration of the term. Similar to CLATs, the grantor receives an income tax deduction based on the value of the trust assets transferred to the charitable organization and any income from the trust is not tax exempt.

Charitable trusts can be complicated when trying to assess the pros and cons of each trust. Notwithstanding the foregoing, they serve as great options for donors with highly appreciating assets seeking to accomplish philanthropic objectives while ensuring for the well-being of their beneficiaries. At Aventus Law Group, we have attorneys who are experienced in tax law and are capable of advising you on nuances involving charitable trusts that are best suited to accomplish your estate planning needs.

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