When my current clients and future clients come to me, not a lot of them know there’s a way to truly provide for people. In building out a solid estate plan, it’s my job to consult with clients and ensure all their needs are met for their family. Generally, the primary focus is their loved ones. As human beings, many of us have a desire to help other people as well. You, yourself, may not know there’s a way to help others at the same time … until now. It’s sort of a ‘kill-two-birds-with-one-stone’ mentality, but for the good. In this first of two blog series, I’ll be covering charitable trusts from a high-level perspective.

An Overview On Charitable Trusts

The two birds from the metaphor above are first, your philanthropic goals and charity and second, estate planning. Charitable trusts are divided into two separate types—a charitable remainder trust (CRT) and a charitable lead trust (CLT). Both types split your assets between charitable giving (charity) and non-charitable beneficiaries (family members). Determining how to best structure your estate and giving will dictate which trust will best benefit you. One important note to keep in mind if you feel a charitable trust is right for you is the permanent capacity in which these exist. To put it in common terms, charitable trusts are irrevocable, meaning they cannot be changed, altered, or reversed, except in very limited circumstances.

The main difference between a charitable remainder trust (CRT) and a charitable lead trust (CLT) is how and when both beneficiaries receive assets and distributions. As with other trusts, these two types of trusts give you control over the timing of the distributions. The major factors to concern yourself with are what assets you have to donate and which of these assets to hold in trust. Consider these basic, but important questions:

  • What are your wealth preservation goals?
  • Which charities are on your list and how will they receive your assets?
  • Who do you want to receive which assets and when?

Charitable Remainder Trusts

A CRT is mostly used for assets which are highly appreciated or non-incoming producing. In this way, they provide somewhat of a payout to either you or the charity/charities tied to the
trust. You choose the time period, which can be for you or someone else’s lifetime or up to a 20- year maximum term. When the term ends, any remaining assets are distributed to the charity/ charities. Through the creation of a CRT, individual beneficiaries will receive the income’s interest. The charities are the parties to receive the remainder. Additionally, a CRT should be considered if you have holdings in real estate and stocks.

Charitable Lead Trusts

A CLT is almost identical to a CRT. However, a CLT makes the payout to the charity first. After a set time period, the trust terminates while the remaining assets and income go to your non- charitable beneficiary. With a CLT, interest from the income is distributed for a set number of years (a maximum term of 20 years). The option to receive income can also last for a person’s lifetime. In this way, all remaining assets will be distributed once the trust is dissolved.

Donor-Advised Funds

While not an official trust, there is a secret option number three to be used with a CLT or CRT. This is known as a donor-advised fund (DAF). The purpose of a DAF is two-fold. First, a donor- advised fund can extend to benefit several charities and second, to offer flexibility for possible distribution changes down the road. This is important to consider because of the irrevocable nature of charitable trusts.

With a donor-advised fund, you can advise (hence the name) how assets are invested, when they are invested and the amount those multiple charities in question will receive. Without a DAF, your assets remain with the potential to grow. “While a donor-advised fund cannot provide a stream of income to a non-charitable beneficiary,” says Deborah Segal, a director at Fidelity Charitable®, “setting one up in conjunction with a split-interest trust can enable you to take advantage of the key benefits of the trust and the donor-advised fund.” — Source: Fidelity

Next week, I’ll be discussing the tax benefits of both charitable remainder trusts (CRT) and charitable lead trusts (CLT). Stay tuned and know that I’m open to discussing both CRTs and CLTs with you for your loved ones and charities in the future.

For questions regarding any of the topics discussed in this blog, please contact me directly at [email protected].

Thank you for reading,
Suzanne Poitras