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Charitable Trusts: Overview

There are two types of charitable trusts: charitable remainder trust (“CRTs”) and charitable lead trusts (“CLTs”). We’ll review each one briefly.

1. CRT has: at least annual distributions to one or more non-charitable beneficiaries; for life of such beneficiaries or for a term of years; with an irrevocable remainder paid or held for the benefit of a charity (the trustee, or the grantor in his living trust or will, may substitute charities, so long as they qualify under Code Section 170). Every CRT is either a Charitable Remainder Trusts (“CRATs”) or Charitable Remainder Unitrusts (“CRUTs”).

1A. Basics of a CRAT are as follows: it pays the noncharitable beneficiary a fixed annuity (dollar amount or percentage of the value of the assets); the term may be either the life of the person living at the time of funding or a term less than 20 years; once funded no additional gifts may be made thus it is best for expensive to value assets such as closely held stock.

1B. Meanwhile a CRUT pays the beneficiary a variable annuity. How much? A percentage of the value of the trust assets at the time of payout, but no more than 50%. As well, assets must be valued annually to determine payout amount, can last the life of the beneficiary or 20 years (max).

2. CLT: in these trusts the charity receives a stream of income while the beneficiaries receives the remainder, basically the inverse of a CRT. Similar to a CRT, a CLT can pay annuity for a term (20 years max) or the life of an individual. In a CLT there is no minimum or maximum payout requirements. A CLT is great for making transfers at a reduced gift tax cost as well as placing all transferred assets’ future appreciate outside the grantor’s estate at the time of funding.

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