Charitable Giving with Trusts: Leaving a Lasting Legacy

Charitable giving is not just an act of generosity—it’s a strategy. High‑net‑worth families and everyday donors alike increasingly weave philanthropy into their estate plans to support cherished causes while balancing their own financial needs. A well‑structured charitable trust allows you to gift appreciated assets to charity, receive an income stream, reduce taxes and create a legacy that endures. This article explains how different types of charitable trusts work, the benefits they provide and the key considerations when integrating philanthropy into a trust plan.

What Makes a Trust “Charitable”?

A charitable trust is an irrevocable legal entity that holds assets and distributes a portion of the trust’s income to qualifying charities or non‑profit organizations. Unlike donor‑advised funds or private foundations, charitable trusts can also provide an income stream to the donor or loved ones. By naming yourself or family members as non‑charitable beneficiaries, you may receive payments from the trust before the remainder goes to charity. Because the trust must distribute a portion of its value to tax‑exempt organizations, contributions may qualify for income or estate tax deductions, and the assets gifted to the trust are removed from your taxable estate.

Two principal types of charitable trusts appear in most plans: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). Each has subtypes that determine how the income stream is calculated and who receives it. Understanding these structures helps donors choose the right fit for their philanthropic and financial goals.

Charitable Remainder Trusts: Donate Assets, Retain Income

A charitable remainder trust (CRT) is an irrevocable trust that allows a donor to contribute property or cash and receive an income stream for life or for a specified term. When the trust ends, the remaining assets go to one or more charities. Federal law requires the charitable remainder to be at least 10 percent of the initial net value of the assets placed in the trust. CRTs are useful for individuals who own highly appreciated assets—such as stock, real estate or a closely held business—because the trust can sell those assets without immediate capital gains tax, deferring tax recognition and potentially providing more funds for investment and charity.

How CRTs Operate

When you fund a CRT, you transfer the asset to the trust and appoint a trustee to manage and invest the property. You also specify the length of the trust term: either for your lifetime (or the lifetime of other named non‑charitable beneficiaries) or for a term of up to 20 years. During this period, the trust pays you or your designated beneficiaries an annual amount drawn from the trust's assets. At the end of the term, whatever remains passes to charity.

Two Subtypes: CRATs and CRUTs

The Internal Revenue Code recognizes two subtypes of CRTs. A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year. The annuity must be at least 5 percent and no more than 50 percent of the initial fair market value of the trust assets. Because the payment amount never changes, a CRAT offers predictability. It is ideal for individuals who want consistent income and are not concerned about outpacing inflation.

A charitable remainder unitrust (CRUT), on the other hand, pays a percentage of the trust’s assets as valued annually. Like a CRAT, the payout must be at least 5 percent and no more than 50 percent. This means your income can rise or fall depending on investment performance, which may be advantageous if you expect the trust assets to appreciate. CRUTs can be designed to allow additional contributions over time, offering flexibility for donors with ongoing philanthropic goals.

Benefits of CRTs

CRTs offer several compelling benefits:

• Predictable Income: Whether you choose a fixed annuity or a fluctuating unitrust payout, a CRT can provide steady cash flow during your retirement years.

• Tax Advantages: Funding a CRT with highly appreciated property defers capital gains taxes when the trust sells the asset. The donor receives an immediate partial charitable deduction equal to the present value of the charitable remainder. Income distributions to beneficiaries are taxed in a specific order: first as ordinary income, then as capital gains, followed by other income, and finally principal or corpus. Many donors use CRTs to convert illiquid or low‑yield assets into diversified portfolios with tax deferral.

• Estate Planning: Because the trust is irrevocable, the assets placed in a CRT are removed from your taxable estate. This may reduce estate tax liability, especially for large estates subject to federal or state estate taxes.

• Charitable Impact: CRTs allow you to make a significant philanthropic gift while still retaining financial benefits. The remainder beneficiaries can be one or more IRS‑qualified charities of your choosing.

Tax Compliance

Operating a CRT requires proper reporting. The trust must file Form 5227 annually with the Internal Revenue Service to report trust income and calculate the amount of the charitable remainder. Because CRTs are tax‑exempt entities for most income, careful bookkeeping ensures that distributions to income beneficiaries are categorized correctly for tax purposes.

Charitable Lead Trusts: Front‑Loaded Generosity

While a CRT defers a gift to charity, a charitable lead trust (CLT) does the opposite. A CLT pays income to a designated charity for a set term, after which the remaining assets pass back to the donor or designated heirs. These trusts are appealing to philanthropists who want to provide immediate support to a charity but ultimately leave assets to family members.

How CLTs Work

When you establish a CLT, you fund it with assets and designate a period during which the trust will make annual payments to one or more charities. After the term ends, the remainder reverts either to you (grantor CLT) or to your heirs (non‑grantor CLT). There are two primary variations: a charitable lead annuity trust (CLAT), which pays a fixed annuity, and a charitable lead unitrust (CLUT), which pays a percentage of the trust value recalculated annually.

Benefits and Tax Implications

A CLT can be structured as either a grantor or non‑grantor trust. A grantor CLT allows the donor to claim an immediate charitable income tax deduction for the present value of the income stream going to charity. However, because the grantor retains beneficial interests, the trust's income is taxed to the grantor. In contrast, a non‑grantor CLT does not produce an upfront income tax deduction for the donor, but it removes the trust assets from the donor's estate and can significantly reduce estate or gift taxes. Non‑grantor CLTs are particularly attractive in a rising interest rate environment because the value of the remainder interest—and thus the taxable gift—is lower.

Philanthropic and Estate Planning Advantages

CLTs are powerful tools for donors who wish to transfer assets to heirs at reduced gift or estate tax cost while also providing substantial support to charities. For example, a CLT can be used to transfer appreciating assets (such as stock or real estate) to children or grandchildren. The payments to charity reduce the taxable value of the gift, and any growth in asset value during the trust term passes to heirs free of additional transfer tax. This approach is particularly effective for assets expected to appreciate significantly over the trust term.

Choosing the Right Charitable Trust

When considering a charitable trust, evaluate your objectives:

1. Income Needs: How much annual income do you require? A CRAT offers stability, while a CRUT adjusts to market performance. CLTs, on the other hand, require no income payments to the donor, instead front‑loading charitable gifts.

2. Asset Type: Are you donating highly appreciated property? CRTs are well suited for converting such assets into diversified investments without incurring immediate capital gains taxes. If you want heirs to receive the assets eventually, a CLT may be more appropriate.

3. Tax Objectives: Do you need an immediate income tax deduction or are you focused on estate tax reduction? Grantor trusts offer the former; non‑grantor trusts achieve the latter.

4. Philanthropic Goals: Determine how and when you want charities to benefit. CRTs provide gifts at the end of the term; CLTs provide them up front. Both can be tailored to support multiple organizations.

Real‑World Scenario

Imagine a couple in their 60s who own $2 million worth of highly appreciated technology stock. They want to support their alma mater’s scholarship fund and simultaneously secure retirement income. By establishing a CRUT that pays them 5 percent of the trust's assets annually, they defer capital gains taxes on the stock sale. The trust invests the proceeds in a diversified portfolio, sending them income each year; any growth benefits both them and the charitable remainder. After the last of them passes away, the remaining assets go to the scholarship fund. Alternatively, if they prefer to make immediate charitable gifts while ultimately transferring wealth to their children, they could set up a CLAT paying the scholarship fund an annuity for 20 years, with the remainder going to their kids. That structure could significantly reduce gift taxes and support the university right away.

Conclusion: Aligning Wealth and Values

Charitable trusts allow donors to align their wealth with their values, offering a structured way to support causes they care about while managing taxes and providing for loved ones. Whether you choose a CRT or CLT, the key is to work with knowledgeable estate planners, attorneys and tax advisors to ensure the trust is structured properly and maintained in compliance with federal and state laws. With careful planning, charitable giving can transcend a simple donation and become a pillar of your long‑term estate strategy, leaving a lasting legacy for both your family and the charities you cherish.