Using Charitable Trusts to Benefit Charity, Reduce Estate Tax and Transfer Wealth

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Including one or more charitable trusts as part of a testamentary estate plan is a creative and powerful way for clients to achieve multiple goals in one estate planning vehicle. Such goals may include donating assets to charity, tax-efficiently transferring wealth to children, and reducing (or even eliminating) estate tax liability.

Two types of charitable trusts that may be included in an estate plan are a charitable remainder trust (CRT) and a charitable lead trust (CLT). There are variations of each type of charitable trust but for simplicity’s sake, the function of a CRT is to distribute a percentage of trust assets to a noncharitable beneficiary(ies) (i.e., the grantor’s children) annually for a defined period of time (e.g., 10 years). The annual payments to the noncharitable beneficiary(ies) must be greater than 5% but no more than 50% of the fair market value of the trust assets, with the assets being revalued annually. The remaining trust assets at the end of the trust’s term are then distributed in a lump sum to a charitable beneficiary, which could be one or more charities, a family foundation or a donor-advised fund (DAF). A CRT does not eliminate all estate tax, but it may produce a significant charitable deduction.

A CLT is essentially the opposite of a CRT. With a CLT, trust assets are distributed annually to a charitable beneficiary for a defined period of time. After such time period expires, the remaining trust assets are distributed in a lump sum to the noncharitable beneficiary(ies). The CLT comes with a benefit that the CRT does not: The amount transferred to a CLT could receive a 100% charitable deduction depending on how the CLT is structured. Although this article describes using such trusts as part of a testamentary estate plan, either or both types of trusts may also be created during a grantor’s life, and instead of existing for a defined period of time, could exist until the death of the grantor.