Using charitable trusts to reduce income tax, provide for retirement, and support your children

How would you like to provide for your retirement and at the same time receive a large tax deduction for charity? How would you like to support your children and at the same time receive a large tax deduction for charity? In the universe of charitable planning, there are two tax-advantaged vehicles that will enable you to achieve these two worthy goals. They are charitable trusts known as the Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLT).

Creating retirement income through a CRT:

A CRT can provide you with an annual stream of retirement income for life. When you pass away, the remaining assets in the CRT will be transferred to a qualified charity of your choice. Two types of CRT are typically used to accomplish this. The Charitable Carryover Annuity Trust (CRAT) and the Charitable Carryover Unit Trust (CRUT). A CRAT pays you a fixed amount each year toward your retirement, while a CRUT pays you a fixed percentage of the trust’s assets each year. To achieve these goals, the IRS requires you to follow certain rules.

CRT Rule #1: The annual annuity you receive each year must be at least 5% (but not more than 50%) of the trust assets.

CRT Rule#2: The terms of the trust cannot exceed the lessor’s 20-year life expectancy of the grantor (you).

A CRT is organized as a tax-exempt trust. It is not subject to income tax. When you donate assets to the trust, you receive a current year charitable tax deduction equal to the actuarial value of the remaining interest. Once the assets are inside the CRT, they can be sold without any of the proceeds being taxed. The only tax you pay is on the retirement distributions you receive each year from the CRT.

Provide for your children through a CLT:

A CLT creates an annual annuity stream that is paid to a qualified charity of your choice for a fixed term. The assets that remain after the expiration of this term are distributed to their children or heirs. Unlike a CRT, a CLT is not a tax-exempt trust. This means that all income earned by the CLT is taxable to the grantor (you) each year. The benefits of a CLT include a deduction of current year charitable contributions, a reduction in your estate tax, and appreciation of trust assets outside of your estate. Your children will receive what is left in the CLT which can then be used to meet their future living needs. Like a CRT, a CLT comes in two forms: a Charitable Master Annuity Trust (CLAT) and a Charitable Master Unit Trust (CLUT). A CLAT pays a fixed amount each year to your charity, while a CLUT pays a fixed percentage of trust assets each year to your charity.

If you think you may be a candidate for charitable planning, contact a CPA and/or estate planning attorney.