What are charitable trusts?

On Behalf of | Jan 30, 2024 | Estate Planning

Many people have charities they want to support, and it’s possible to do that even after they pass away. Charitable trusts play a significant role in estate planning by offering a unique way for individuals to contribute to charitable causes while benefiting from potential tax advantages. These trusts support one or more charitable organizations with specific rules governing their operation. 

Charitable trusts allow individuals to make substantial charitable gifts, potentially reducing estate taxes and providing a legacy. Two common charitable trusts are used in estate planning. These are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). 

Charitable remainder trusts 

A CRT provides income to the donor or other named beneficiaries for a period after which the remaining assets are transferred to one or more charitable organizations. This type of trust can be set up to pay an annuity as a charitable remainder annuity trust or to pay a percentage of the trust’s value as a charitable remainder unitrust. 

CRTs are irrevocable, meaning the terms can’t be altered once they are established. Donors may receive a partial tax deduction for the charitable contribution. The assets placed in the trust may grow tax-free.

Charitable lead trusts 

A CLT provides income to a charity for a specific term. After that term, the remaining assets are passed to the beneficiaries. CLTs can be a strategic tool for reducing estate and gift taxes on assets passed to heirs. They benefit individuals who wish to support a charity immediately.

Charitable trusts are only one part of a comprehensive estate plan. Working with someone familiar with these matters is beneficial so estate plan creators can ensure the way everything is set up meets their wishes.