Charitable Trusts (CLTs, CRATs & CRUTs)

Charitable trusts are useful estate planning devices that allow charitably inclined donors to accomplish their philanthropic goals by making gifts to their favorite qualifying charitable organizations and obtain income, gift and estate tax benefits. Charitable contributions will remove assets from a donor's estate. Charitable contributions may be made of a donor's entire interest in property or of just a partial interest in property. Charitable trusts include the CLAT, CLUT, CRAT, CRUT, NICRUT, NIMCRUT and FlipCRUT. All have different estate tax, gift tax, generation skipping tax, and income tax implications. This discussion addresses some of the various tax and financial advantages of some CRTs when the donor is the life income beneficiary.

Charitable Remainder Trusts (CRT)

One very useful technique is to give a "remainder interest" in property. This is called deferred giving or planned giving. While this is usually referred to as deferred giving, the charitable recipient, unquestionably receives an immediate gift of an interest in property, and the donor receives an immediate deduction. However, the charity's enjoyment of the gift is deferred to a future date.

CRTs allow the donor considerable income tax benefits, such as an income tax deduction, no income tax liability on the transfer of appreciated property, no income tax liability on a sale of appreciated property in the trust, tax free accumulation of income inside the trust and deferral of income taxation to the beneficiary until the income or gain is actually received. Income tax deductions are subject to limitations.

Typically, with a CRT, a donor transfers property to a trust that provides that one or more non-charitable beneficiaries (recipients) receive a specified amount each year for their lifetime or a term of years. On the death of the final recipient or at the end of the term, the trust terminates and the balance of the principal is distributed to charity.

The donor therefore has a life income interest in the property and the charity, a remainder interest, each of which has a value on the date of the gift. The donor will receive a current income tax charity deduction and a gift tax deduction. Therefore, there will be no gift tax liability unless someone other than the donor receives the income interest. The tax deduction available to the donor depends on the value of the property, the age of the donor and beneficiary or beneficiaries, and the period of time that the income interest will exist. The higher the value of the donor's interest (annuity payout rate), the lower the charitable deduction.

The main deterrent to this type of charitable planning is that the property transferred to the trust is permanently lost to the family except for the annuity or unitrust payments.

Where the income interest is owned by non-charitable beneficiaries, and the remainder interest belongs to a charity, the trust must take one of three qualifying forms: a charitable remainder annuity trust (CRAT), a charitable remainder unitrust (CRUT), or a pooled income fund (PIF).

CRATs & CRUTs

The major difference between CRATs and CRUTs is the form of the distributable amount payable to the non-charitable beneficiary receiving current distributions.

A CRAT pays the recipient a fixed annuity each year for the term and a CRUT pays the recipient a fixed percentage of the annually determined net fair market value of the trust assets for the term, in a sense, a variable annuity. The property remaining in the CRAT or CRUT passes to charitable beneficiaries on the recipient's death or at the expiration of the term of years.

By law, both CRATs and CRUTs are required to pay a certain sum (or percentage) at least annually. A CRT must be either an annuity trust or a unitrust in every respect, it cannot have aspects of both.

Charitable Lead Trusts (CLT)

A CLT is a trust that initially makes all distributions to charity in the form of an annuity or unitrust interest followed by a non-charitable remainder interest.

If the charitable interest is an annuity, the trust is referred to as a CLAT and if the interest is a unitrust the trust is referred to as a CLUT.

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