Charitable trusts can be a valuable tool in estate planning. They allow individuals to support causes they care about while also gaining potential tax benefits.
Here are the most common types of charitable trusts used in estate plans.
Charitable remainder trusts
A charitable remainder trust (CRT) lets you provide income to yourself or someone else for a set period. After that, the remaining assets go to a qualified charity. This type of trust can be either a unitrust, which pays a percentage of the trust’s value each year, or an annuity trust, which pays a fixed amount.
CRTs can offer potential tax benefits. These may include a charitable deduction for the present value of the future donation and relief from capital gains tax if appreciated assets are used to fund the trust.
Charitable lead trusts
A charitable lead trust (CLT) works in the opposite way. The charity receives income from the trust first, for a set number of years. After that, any remaining assets go to non-charitable beneficiaries, such as children or other heirs.
This type of trust can be useful for reducing the value of a taxable estate. It may also help preserve wealth for the next generation while supporting charitable causes during the donor’s lifetime.
While not technically a trust created by the donor, a pooled income fund is another charitable option. Donors contribute to a fund managed by a charity. Income is paid to the donor or other beneficiaries, and the charity receives the remainder.
Each option has its own requirements. Choosing the right one depends on your goals and financial situation. Seeking legal guidance will help you find the best option.
