A charitable trust can be a used as a flexible and effective strategy to help donors meet philanthropic goals while providing income and estate tax benefits. Trusts are structured based on each donors’ unique needs and goals to optimize both charitable and tax benefits as well as the financial benefit to beneficiaries. Through careful consideration of funding assets, payout structure, trust period and other terms, trusts can offer creative solutions to planning challenges.
This guide provides an overview of different charitable trusts while illustrating how they can be structured to maximize impact for both the donor and beneficiary.
A Charitable Remainder Unitrust, or CRUT, is an irrevocable trust that provides distributions to beneficiaries for life or a fixed term up to 20 years. The amount of the distribution is based on a fixed percentage (5% or greater) of the net fair market value of the trust’s assets and is recalculated annually. The assets remaining in the trust at termination pass to charity.
The following illustration highlights how CRUTs can be used to generate regular income to meet lifetime income needs and create a charitable legacy as part of an integrated wealth plan.
A Net Income Charitable Remainder Unitrust, or NICRUT, is a CRUT that provides distributions to beneficiaries of the net income earned in the trust. NICRUTs can have a “flip” provision which will change the distribution amount from the trust’s net income to that of a standard fixed percentage CRUT. The trust can “flip” to a standard fixed percentage on a specific date (“triggering date”) or event (“triggering event”) that is not discretionary or within any person’s control.
The illustration below demonstrates how a “flip” NICRUT can be used to provide for future family income needs.
A Charitable Lead Trust, or CLT, is an irrevocable trust that makes current distributions to charity of a fixed amount or percentage of the trust assets for the trust term. Upon termination, the remaining trust assets pass to any person designated by the grantor at the inception of the trust. CLTs can be offered in two forms: Charitable Lead Annuity Trust (CLAT) and Charitable Lead Unitrust (CLUT), the difference being the method used to calculate the payment to charity.
As shown in the following illustration, a Charitable Lead Trust can be used to satisfy both charitable intentions and future gifts to grandchildren at a reduced gift tax cost.
These are just a few examples of how charitable trusts can be used creatively. With thoughtful planning in consultation with a trusted advisor, donors can use charitable trusts to benefit the causes they care about while also seeing a financial benefit.
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