We hope that we have communicated to you, our reader, that wealth is a great tool. This website focuses on increasing and retaining wealth with the goal of going from rich to wealthy. This entry will focus on giving it away! There are many ways to use one’s wealth to serve the public interest: for some high net worth individuals and families, generational wealth is often used to advance charitable causes. Charitable trusts provide tax deductions to wealthy individuals and families in order to fund the good work that charities, universities and non-profits do on a daily basis.
There are two main types of charitable trusts: charitable remainder trusts (CRT) and charitable lead trusts (CLT).
A charitable remainder trust (CRT) is an irrevocable trust where the grantor or donor receives income from the trust for a set number of years or until the death of the beneficiary or successor beneficiary (e.g. wife or children). When the set time period has ended, i.e. the trust has terminated, the remainder of the trust goes to a public charity or a private foundation. In other words, there are two sets of beneficiaries – income beneficiaries and the charity/charities of choice – and provisions can be made to ensure that a percent of trust income is provided to whoever is needed for however long with the remaining trust assets transferred after a set time period or event. CRTs can be further subdivided into CRATs (Charitable remainder annuity trust) and CRUTs (Charitable remainder unitrust). CRATs are formed to provide a non-charitable beneficiary a set amount each year for a certain number of years for life. After the death of the donor/beneficiary, the remainder passes to the charity. CRUTs, on the other hand, are formed to provide a non-charitable beneficiary a set percentage each year for a set time period, after which the remainder transfers to the charity. The main difference between CRATs and CRUTs is that CRATs will pay the beneficiary a set income amount while CRUTs will pay a varying income amount depending on the performance of the trust investments.
A charitable lead trust (CLT) is the opposite of a CRT. CLTs provide the charity with an annual payment for a set number of years. After the term has ended, the donor or beneficiary receives the remaining amount in the trust. There are two main subtypes of CLTs: CLATs (charitable lead annuity trust) and CLUTs (charitable lead unitrust). CLATs provide a charity a predetermined payment amount each year for the length of the term, with the remaining amount passing back to the donor or beneficiary. CLUTs provide a charity a variable annual amount depending on the trust’s investment returns or losses, with the remainder transferring to the donor or beneficiary.
Due to the difference in the structure and function of charitable trusts, they are strategically employed in different circumstances. The tax implications vary greatly. For example, CRTs are an extremely effective tool for anyone retaining highly appreciated assets (stocks, real estate) with low basis. Funding the CRT with these highly appreciated assets gives the donor the ability to sell the assets without incurring a capital gain, benefit from the charitable income tax deduction, reduce estate taxes and benefit from the resulting income stream. On the other hand, a charitable lead trust (CLT) is a strong tool to reduce a donor’s taxable income and eventually allow beneficiaries to face lower gift and estate taxes.