Can You Benefit by Setting Up a Charitable Trust?

Trust & Estate planning is an essential part of retirement planning although many people aren't aware of all that it encompasses. So they put it off until it's often too late. Let's take a look at what trust and estate planning addresses and why it's important to begin it ASAP regardless of your wealth.

A charitable trust must have a charity as one of its beneficiaries. Among its benefits is that it can give you current retirement income and tax deductions while you are alive, and reduce estate tax at your death, thereby making it a powerful estate planning tool.

The grantor (who is the donor too) generally chooses his trustee and beneficiaries which may include himself. The charitable trust is an irrevocable trust so only the trust document–under the trustee–controls the trust property. But of course, the grantor participates in the construction of the trust document.

The advantages of creating a charitable trust depend on its type. The grantor (presuming he funds the trust):

May get present income tax deductions for his contribution to a charity.
Can receive an annual income from the trust for himself or his beneficiaries.
Can get gift and estate tax deductions again due to his gift to charity through the trust.
Can control--through the trust document–who will be both charitable and non-charitable beneficiaries.

Charitable trusts fall into two categories. If the charitable trust is set up to give the charity a yearly retirement income for the duration of the trust with the remainder of the trust funds going to the non-charitable beneficiaries, then it is called a charitable lead trust (CLT).

If this is reversed so that the charity gets the remainder, while the non-charitable beneficiaries get the yearly income during its duration, then it is called a charitable remainder trust (CRT).

So that there is no manipulating of trust funds to diminish the charity’s share either way, each charitable trust type must conform to precise rules of how much money goes to charity, in order for the grantor to maintain his charitable deductions. To address this concern the IRS has clear rules on what must be allocated in each case.

For a Charitable Lead Trusts (CLT), a charity may receive its yearly income from the trust in a fixed amount – as an annuity. In this case it is called a Charitable Lead Annuity Trust (CLAT). But if the charity receives its yearly income as a fixed percentage (called a unitrust amount) of the trust value, it is called a Charitable Lead Unit Trust (CLUT)

For Charitable Remainder Trusts (CRTs), that trust is called a Charitable Remainder Annuity Trust (CRAT) if it receives the trust remainder after the non-charitable beneficiaries are paid an annuity during the trust duration. Likewise, the trust is called a Charitable Remainder Unit Trust (CRUT) if it receives the trust remainder after the non-charitable beneficiaries are paid a fixed percentage (called a unitrust amount).

So there you have them - CLATs, CLUTs, CRATs and CRUTs … not so confusing!

What Will It Be--a Charitable Remainder Annuity Trust or a Charitable Remainder Unitrust?

Charitable remainder trusts (CRTs) give you income now – for the rest of your life, if you choose–with the remainder of the trust going to the charity of your choice. And of course you get income and eventual estate tax breaks for your charitable donation.

As with all estate planning trusts, the grantor can choose the trust’s beneficiaries and the trustee. He can choose himself for either too. The typical grantor/donor is looking for income for life or a specified term of years. He or she is typically between 55 and 80 years old.

The "income tax deduction" you actually receive depends on the present value of the charitable remainder trust’s remainder to charity. To determine it, the Internal Revenue Service (IRS) considers the ages of the donor and other income beneficiaries, the annual payout of the trust, and an IRS index rate known as the Applicable Federal Rate (AFR). If the present value of the remainder interest equals at least 10% of the value of assets transferred into the trust, then the trust may qualify as a charitable remainder trust. So the older the donor, the greater will be the current charitable deduction.

Charitable remainder trusts come in two flavors. If you want a guaranteed income amount every year (like an annuity) you will create a Charitable Remainder Annuity Trust (CRAT). If you are willing to take a set percentage of the fund’s value (called a unit amount) you will create a Charitable Remainder Unit Trust (CRUT).

In the table consider the comparison between the donor’s desires and the trusts features for a CRUT and a CRAT.

	CRUT	CRAT
Donor Wants:	More income as trust value increases	Fixed income based on initial trust value
Donor Wants:	Wants to make additional gifts to trust as time goes on	No additional gifts to trust
Trust Features:	Income for life, but variable payments—fixed percentage of fund’s value	Income for life with fixed payments
Trust Features:	Flexible investment possibilities	Asset investment designed to balance income and principal preservation

The charitable remainder Unitrust allows you to be more aggressive at investing the trust’s funds, but–as always–with increased risk.

Another Option: A Pooled Income Fund

Larger charitable institutions often set up a pooled income fund. Contributions to this fund by donors result in a charitable deduction for both income and gift tax purposes. The donor, alone, or with his spouse (or anyone else named by the donor) receives for his life a share of the fund's income. The income amount is measured by the number of units of participation the donor purchased. The charitable deduction results from the fact that the donated amount becomes the charity's property at the termination of the life interest or interests.