Charitable Trusts A Charitable Alternative that Gives Back to the Donor

By: Valerie L. Hamlet (May, 2011)

Charitable giving doesn't always have to be the annual check written on December 31 or weekly cash donated to a collection plate. Philanthropic minded people get more "bang for their buck" if they use an estate planning vehicle such as an intervivos (during life) charitable trust.

An intervivos charitable trust is established during a person's lifetime and has some sort of charitable component. The charity may get annual income payments from the trust during the donor's lifetime. Or the donor retains the lifetime income stream and the charity receives the trust residuary balance after the donor dies. Any income stream received by either the charity or the donor can be a fixed amount or it can vary depending on the performance of the trust assets.

Donors determine the lifetime income beneficiaries and the residuary (post death) beneficiaries of the trust when it is established. In order for the donor to take a charitable deduction, at least one of those beneficiaries (income or residuary) must be a qualified charitable organization as determined by the IRS.

The four most common types of charitable vehicles are the Charitable Remainder Annuity Trust ("CRAT"), the Charitable Remainder Unitrust ("CRUT"), the Charitable Lead Annuity Trust ("CLAT") and the Charitable Lead Unitrust ("CLUT").

Unitrust vs. Annuity Trust

If a charitable trust has a unitrust provision (CRUT/CLUT), then the Trustee pays a stated "unitrust" percentage of the trust assets value to an income beneficiary annually for the donor's lifetime. Each year, usually on December 31, the fixed "unitrust" percentage is applied to the trust asset value and that amount is required to be paid to the income beneficiary. As a result, the annual payments to the income beneficiary will vary depending on the market performance of the trust assets.

If a charitable trust is an annuity trust (CRAT/CLAT), then the Trustee pays a fixed dollar amount of income to the income beneficiary each year. The fixed stated amount is determined when the trust is set up and that amount is paid to an income beneficiary regardless of the actual income earned or the trust asset performance.

Remainder vs. Lead Trust

If the donor names a charity as the residuary beneficiary (CRUT/CRAT), the trust is a remainder trust. Upon the donor's death, the remaining balance of the trust is paid to the charity.

If the donor names a charity as the lifetime income beneficiary (CLUT/CLAT), the trust is a Lead trust. A Lead trust pays a stream of income payments to the charity during the donor's lifetime and the residuary is paid to the donor's heirs.

Advantages and Disadvantages

Whatever type of trust is established will determine the amount of the income tax deduction taken by the donor. In the case of a Lead Trust, the current stream of payments is deductible, whereas in the case of a remainder trust, only the present value of the future payment anticipated to be made to the charity will be deductible.

A disadvantage of the annuity trust is that the underfunded trust or poorly performing assets could be exhausted before the donor's death. If the trust assets have a poor market performance (trust value dwindles), yet the annual income payments are fixed at a specific value, the trust will have negative growth. In the case of an underfunded trust, the income tax deduction of the donor could be disallowed by the IRS. Because of these risks, the tax deduction percentage is lower for an annuity trust than a trust with a unitrust provision.

An advantage of the unitrust provision is that a higher deduction percentage is taken because the trust can never be exhausted prior to the donor's passing. The unitrust makes annual income payments to an income beneficiary based on the end of the year value of the trust assets. The trust will always have positive growth and therefore a larger tax deduction percentage is allowed. The donor can make a smaller donation and receive a larger tax benefit.

Who should consider this type of gifting?

The annual administration of these trusts is not simple and this type of gifting is usually reserved for a fairly sophisticated estate plan. If the charitable trust is not administered properly, the tax deduction could be disallowed. However, with proper education from the professionals and a little annual guidance from a tax professional, the average donor should have access to these powerful gifting tools.

The donor who needs or desires a lifetime stream of income from the trust should consider the remainder trusts (CRAT/CRUT). If the donor is not concerned with an income stream during life, then there are more tax benefit from a Lead trust (CLAT/CLUT).

Donors need to consider their preference for gifting during life or after they die. Some donors like to see the benefit of their donation during their life while others prefer to use charitable gifting as a memoriam of themselves or their family members.

If you are interested in the philanthropic advantages that a charitable trust can offer, call our offices and talk to one of our tax professionals.

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