A charitable remainder trust (CRT) allows you to make an irrevocable split-interest gift (a gift that partially benefits a charitable organization and partially benefits a non-charitable beneficiary, such as yourself or an heir). In this case, one or more non-charitable beneficiaries receive income payments for a specified period (up to 20 years) or for their lifetime and then the rest goes to the non-profit (the remainder beneficiary) at the end of the trust period.
You may be eligible for a partial income tax deduction based on the amount that will pass to the charitable beneficiary. You can fund a CRT with cash, appreciated securities, retirement accounts or other assets such as real estate. Payments to you or other income beneficiaries may be taxable depending on how you structure the CRT. The amount and types of taxes owed are determined by the types of assets contributed.
Charitable remainder annuity trust vs. charitable remainder unitrust comparison
|Charitable remainder annuity trust (CRAT)
|Charitable remainder unitrust (CRUT)
|Allows for additional contributions
The remainder beneficiary can be a public charity, donor-advised fund (DAF) or private foundation. By naming a DAF the remainder beneficiary, you can freely change the charities and express your wishes for how the assets will be managed once in the DAF.
A CRT can help defer capital gains tax on highly appreciated securities. The appreciated security can be sold and diversified within the trust without incurring capital gains until the income is paid to you or other income beneficiaries.
Consider this charitable giving vehicle if you're interested in making a relatively large charitable donation now in exchange for a future income stream and a partial income-tax deduction.
With a charitable lead trust (CLT) you place an irrevocable gift in the trust and the CLT makes payments to a designated charity(ies) for either a specified number of years or for the remainder of the grantor's life. A non-charitable beneficiary (an heir) receives the remaining balance at the end of that period. There are several ways to structure a CLT to fit your specific needs.
Ways to structure a CLT
Fixed payments to charity based on initial contribution
Variable payments to charity based on current value
A grantor CRT provides for an immediate, partial income tax deduction, but this will be somewhat offset by paying taxes on trust income. Due to the way the tax deduction is calculated, charitable giving vehicles tend to be more favorable in lower interest-rate environments.
Consider a CLT if you're charitably inclined and wish to generate a partial income-tax deduction or you'd like to pass appreciated assets to heirs while potentially minimizing or eliminating gift or estate taxes.
Like CRTs, charitable gift annuities (CGAs) provide you the opportunity for a partial income tax deduction and a fixed, future income stream. However, a CGA is typically offered by large, national charities, including some universities. It is a contract to provide guaranteed payments for life to you and up to one additional beneficiary (typically a spouse) in exchange for an irrevocable gift to the charity. Depending on the sponsoring charity, you may be able to gift cash, appreciated securities or even other property (such as real estate).
Income can be paid to you and the other income beneficiary jointly (at the same time) or successively (payments to the other income beneficiary that begin after your death). Income payments are taxable to the income beneficiary and depend on the type of assets contributed.
Charitable gift annuity vs. charitable remainder trust comparison
|Charitable gift annuity
|Charitable remainder trust
Limited to you + one additional person
One or more
|The sponsoring charity
|Fixed or variable
You may be eligible for a partial tax deduction at the time of the gift as determined by:
- Your age at the time of the gift
- Anticipated income stream
- Additional beneficiary and their age
- When the annuity begins
- Life expectancy for all annuitants
- Rates mandated by the IRS
However, not every charity offers a CGA, so while it may be a good fit for your financial situation, it may not be an option in supporting your chosen charity. Additionally, your gift to a CGA will only benefit the sponsoring charity, so if you want to support multiple charities, you will need to set up multiple CGAs or consider another giving strategy.
Pooled income funds (PIFs) are administered by a specific charity. They allow for an irrevocable gift to the fund in exchange for a current income tax deduction and lifetime income for a named beneficiary. Income paid to the beneficiary is based on actual income generated by the fund versus a specified amount or percentage of assets. Income is taxable to the income beneficiary at ordinary income tax rates.
PIFs may be a good charitable option for individuals seeking future income that may keep up with inflation and who may not be interested in making a donation large enough to fund a CRT.
A foundation is a legal entity set up and administered by you, the benefactor, solely for charitable purposes. This type of charitable entity does not typically rely on public fundraising like most charities, but instead generally gets its funding from a single person, family, or corporation. Because it is its own legal entity, it can theoretically exist in perpetuity, allowing you to leave a legacy that remains after you've passed.
However, it's important to note that foundations can be costly to set up and maintain, time consuming, administratively burdensome and require relatively large amounts of capital, typically at least $1 million, to establish.
There are two main types of foundations:
- Non-operating foundation: This type of foundation is primarily engaged in making grants to support public charities or other charitable endeavors. Non-operating foundations make up the majority of all foundations. Per IRS rules, they must generally make annual distributions equal to 5% of their prior year's average net assets.
- Operating foundation: This type of foundation must be significantly involved in its own projects in a continued and sustainable way. These entities are required to spend a major portion of their investment income on operations.
Because foundations are run by the founder, they offer the most control in how money is invested and granted. As its own legal entity, a foundation can theoretically exist in perpetuity, so it is an attractive option for individuals who wish to establish a charitable legacy. Many wish to involve family in grant making and operations of the foundation.