Does a Charitable Trust Make Sense for Your Client?

A CRT is a split-interest trust. The donor receives a partial tax deduction for the assets donated to the trust. This is based on the trust assets that will ultimately revert to the trust's charitable beneficiaries. They can name themselves and/or other non-charitable beneficiaries to receive an income stream for 20 years or for the life of one or more of these beneficiaries. After that, the remaining assets revert to the charitable beneficiary of the trust.

There are two versions of a CRT: 

• Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year. Additional contributions to the trust are not allowed.
• Charitable remainder unitrusts (CRUTs) distribute a fixed percentage of the trust balance, which is recalculated each year. Additional contributions to the trust are allowed. 

A charitable remainder trust is a good option for clients who want an immediate charitable deduction but would also like to create an income stream for themselves or other beneficiaries. This can help create an income stream in retirement for your client. 

A CRT can also provide income for beneficiaries without giving them control of the assets in the trust. This can be a good solution in cases where clients are concerned about giving a lump sum to beneficiaries but do want to provide an income stream for them.

Assets donated to a CRT will generally not be part of your client's estate upon their death, which can be an important benefit as the estate and gift tax exclusion shrinks in 2026. 

Charitable Lead Trusts

A charitable lead trust works in an opposite fashion from a CRT. It is an irrevocable trust funded with a donation of cash, securities or other assets. With a charitable lead trust, payments are made to one or more designated charities over a set term with the remainder then reverting to non-charitable beneficiaries, such as the donor or other family members. A charitable lead trust can be funded during the donor's lifetime or upon their death through a trust or their will. 

The term "lead" refers to the charity's lead interest in the trust, which refers to the charity's right to receive payments before the non-charitable beneficiaries for the term specified in the trust. 

There are two versions of a charitable lead trust that your clients can consider: 

• Grantor charitable lead trust: Under this arrangement, your client as the grantor of the trust can take an immediate tax deduction for the present value of the payments that will be made to the charitable organization. This is subject to any limitations pertaining to the charity's status as either a public charity or a private foundation. However, this upfront deduction is offset by the fact that the income from the trust is taxable to the grantor during the term of the trust.
• Non-grantor charitable lead trust: Under this arrangement, the trust, not the grantor, is considered to be the owner of the assets in the trust. Since your client as the grantor does not own the trust assets, there is no immediate tax deduction available to them. Rather, the trust pays any taxes on undistributed net income, and it is able to claim an unlimited charitable tax deduction for the distributions made to the charitable beneficiaries. This structure offers greater advantages when it comes to gift and estate taxes. 

Both types of charitable lead trusts can be structured as reversionary, meaning that the trust assets revert to the grantor, or as non-reversionary, meaning the trust assets will be distributed to beneficiaries other than the trust grantor. 

A non-grantor charitable lead trust can be a good option for your client if their priority is the ability to pass appreciated assets to their non-charitable beneficiaries with reduced gift and estate taxes. The trade-off is that your client must be able to surrender access to those assets and any income they might generate during the term of the trust.