Charitable Trusts
I.R.C. § 664
What Are Charitable Trusts?
Charitable trusts are specialized legal arrangements that enable individuals to contribute to charitable organizations while also achieving personal financial objectives. These trusts can provide donors with income streams, tax advantages, and the satisfaction of supporting charitable causes.
What Are Some Types of Charitable Trusts?
- Charitable Remainder Trusts (CRTs)
- CRATs (Charitable Remainder Annuity Trusts)
- CRUTs (Charitable Remainder Unitrusts)
- NIMCRUTs
- NICRUTs
- Charitable Lead Trust (CLT)
- CLATs
- CLUTs
A Simple Way to Understand
Charitable Trusts
- A Charitable Trust is a special account that lets you give to a cause you care about while still getting financial benefits for yourself or your family
- Think of it like a piggy bank with two slots, one side helps a charity over time, and the other side helps you or your loved ones
- You put in assets like cash, stocks, or property, and the trust pays out income based on the rules you choose
- You may get a tax deduction the year you set it up, and you can avoid paying capital gains tax when the trust sells the assets
- It is a way to support a charity, lower your taxes, and create income, all from the same plan
What Is a Charitable Remainder Trust (CRT)?
A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to designated non-charitable beneficiaries for a specified period—either for life or a term of up to 20 years. After this period, the remaining trust assets are transferred to one or more qualified charitable organizations. CRTs offer donors an immediate charitable income tax deduction based on the present value of the remainder interest that will eventually go to charity. Additionally, they allow for the deferral of capital gains taxes on appreciated assets used to fund the trust.
How It Works
- Establishment: The donor creates the CRT and transfers assets into it.
- Income Distribution: The trust provides income to the donor or other named beneficiaries for the trust’s term.
- Remainder to Charity: At the end of the term, the remaining assets in the trust are distributed to the designated charitable organizations.
Who It’s For
CRTs are suitable for individuals who wish to make significant charitable contributions while retaining an income stream for themselves or their beneficiaries. They are beneficial for those holding appreciated assets, such as stocks or real estate, as the trust can sell these assets without incurring immediate capital gains taxes.
Considerations
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Irrevocability
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Complexity and Costs
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Reduced Inheritance for Heirs
What Is a Charitable Remainder Annuity Trust (CRAT)?
A Charitable Remainder Annuity Trust (CRAT) is a type of CRT that pays a fixed dollar amount annually to the non-charitable beneficiaries. The payment amount is determined at the inception of the trust and remains constant throughout the trust’s term, regardless of the trust’s investment performance. The annual payment must be at least 5% but not more than 50% of the initial fair market value of the assets contributed to the trust. Additional contributions to a CRAT are not permitted after its creation.
How It Works
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Funding: The donor transfers assets into the CRAT.
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Fixed Payments: The trust pays a fixed annuity amount to the beneficiaries annually.
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Remainder to Charity: After the trust term ends, the remaining assets are distributed to the designated charitable organizations.
Who It’s For
CRATs are ideal for donors seeking a predictable and stable income stream, especially those who prefer fixed payments that do not fluctuate with market conditions.
Considerations
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Inflation Risk
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Once established, additional assets cannot be added to the trust.
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Irrevocable
What Is a Charitable Remainder Unitrust (CRUT)?
A Charitable Remainder Unitrust (CRUT) is an irrevocable trust that allows donors to contribute assets, receive a variable income stream, and ultimately benefit one or more charitable organizations. This estate planning tool is particularly advantageous for individuals seeking to support charitable causes while also securing financial benefits for themselves or their beneficiaries.
How CRUTs Work
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Establishment: The donor transfers assets—such as cash, securities, or real estate—into the CRUT.
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Income Distribution: The trust pays a fixed percentage (minimum of 5%) of its annually revalued assets to the designated beneficiaries. This means the income can fluctuate based on the trust’s performance.
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Charitable Remainder: After the specified term (up to 20 years) or upon the death of the last income beneficiary, the remaining assets are distributed to the chosen charitable organizations.
Who Should Consider a CRUT?
- People who own appreciated assets and wish to avoid immediate capital gains taxes upon sale.
- Those who seek a charitable legacy while retaining an income stream.
- Those who desire flexibility in income payments that reflect the trust’s investment performance.
Considerations
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Income Variability from fluctuating income payments
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Irrevocability
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Complexity and Costs
What's a NIMCRUT?
A Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) is another variation of the CRUT that includes a “makeup” provision. Similar to a NICRUT, it pays the lesser of the fixed percentage or the actual net income. However, in years when the trust’s income exceeds the fixed percentage, it can “make up” for previous years when the income was less than the fixed percentage, distributing the excess to the income beneficiaries.
Key Features of NIMCRUTs
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Makeup Provision: Allows for the accumulation of unpaid distributions in low-income years to be compensated in high-income years.
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Flexibility: Beneficial for donors who anticipate variable income from the trust’s assets and wish to potentially receive higher distributions in profitable years.
Example
Consider a NIMCRUT funded with $1 million and a 5% payout rate. In the first year, the trust earns $30,000, so only $30,000 is distributed, creating a $20,000 shortfall from the expected $50,000. If in the following year the trust earns $70,000, it can distribute the standard $50,000 plus the $20,000 shortfall from the previous year, totaling $70,000 to the beneficiary.
What's a NICRUT?
A Net Income Charitable Remainder Unitrust (NICRUT) is a variation of the standard CRUT designed to pay the lesser of a fixed percentage of the trust’s assets or the actual net income generated by the trust each year. This structure is particularly useful when the trust is funded with assets that may not produce consistent income, such as real estate or closely held stock. In years when the trust’s net income is less than the fixed percentage, only the actual income is distributed, preserving the trust’s principal.
Key Features of NICRUTs
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Income-Based Payments: Distributions are limited to the trust’s net income, which may result in lower payments in years of low income generation.
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Principal Preservation: By restricting distributions to net income, the trust’s principal is protected, potentially benefiting the remainder charitable beneficiary.
Example
A NICRUT is funded with $1 million in non-dividend-paying stocks and has a 5% payout rate. If the trust earns $30,000 in income during the year, only $30,000 is distributed to the beneficiary, even though 5% of the trust’s value would be $50,000. This ensures that the principal remains intact during low-income years.
What Is a Charitable Lead Trust (CLT)?
A Charitable Lead Trust (CLT) is an estate planning vehicle that allows individuals to support charitable organizations while ultimately transferring assets to non-charitable beneficiaries, typically family members.
This arrangement enables donors to fulfill philanthropic goals, potentially reduce tax liabilities, and pass on wealth to heirs.
In a Charitable Lead Trust, the donor establishes an irrevocable trust funded with assets.
- Cash, Publicly Traded Securities, Real Estate, Closely Held Stock, or other Complex Assets
When discussing Charitable Lead Trusts (CLTs), two primary types emerge: Charitable Lead Annuity Trusts (CLATs) and Charitable Lead Unitrusts (CLUTs). Both structures involve providing income to a charitable organization for a specified period, after which the remaining assets are transferred to non-charitable beneficiaries. The key distinction between them lies in how the charitable payments are calculated.
- Charitable Lead Annuity Trust (CLAT): Provides fixed annual payments to the charity, offering predictability in the amount donated each year.
- Charitable Lead Unitrust (CLUT): Delivers payments that vary annually, calculated as a fixed percentage of the trust’s annually determined value, allowing for potential growth or decline based on the performance of the trust’s assets.
At the conclusion of the trust term, the remaining assets are distributed to the designated non-charitable beneficiaries.
- (Such as the donor’s children or other heirs.)
What's a Charitable Lead Annuity Trust (CLAT)?
Payment Structure: Provides the charity with fixed annual payments, determined at the trust’s inception.
Calculation Basis: The annual payment is a fixed dollar amount, often calculated as a percentage of the initial fair market value of the trust assets.
Implications:
- Offers predictability in charitable contributions.
- If the trust’s investments perform well, the remainder beneficiaries may receive a larger residual amount.
- Conversely, if investments underperform, the fixed payments may erode the trust principal.
What's a Charitable Lead Unitrust (CLUT)
Payment Structure: Provides the charity with annual payments that vary based on the trust’s value each year.
Calculation Basis: The annual payment is a fixed percentage of the trust’s assets, revalued annually.
Implications:
- Aligns charitable payments with the trust’s performance; payments increase with positive returns and decrease with negative returns.
- Offers a hedge against market volatility, preserving the trust’s principal during downturns.
What Are the Advantages of Charitable Trusts?
Tax Benefits
Donors may avoid capital gains taxes on appreciated assets, receive immediate income tax deductions, and perhaps lower their inheritance taxes by removing assets from of the taxable estate through charitable trusts.
Regular Income Stream
Certain types of charitable trusts, such as Charitable Remainder Trusts (CRTs), provide donors or their designated beneficiaries with a consistent income stream for a specified period or for life.
Philanthropic Intent
Donors can support charitable causes that align with their values, ensuring that their assets contribute to meaningful initiatives and create a lasting legacy.
Asset Diversification and Management
By placing assets into a charitable trust, donors can facilitate the diversification and professional management of their investments, potentially leading to more effective asset growth and distribution.
What Are the Rules for Charitable Trusts in 2026?
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Adjusted Gross Income (AGI) Limits: When an income tax deduction is available, cash contributions to public charities are generally deductible up to 60% of AGI under current law.
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Estate and Gift Tax Exemption: Under current law, the federal estate and gift tax exemption is approximately $15 million per individual in 2026, subject to inflation adjustments and future legislative changes.
What Do Charitable Trusts Have in Common?
Charitable Income Tax Deduction
Certain charitable trust structures may provide a charitable income tax deduction depending on the trust type and how it is structured. When an income tax deduction is available, it is generally based on the present value of the charitable interest and is subject to Adjusted Gross Income (AGI) limits under current law.
Under current law, charitable contribution deduction limits are generally:
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Cash contributions: Up to 60% of AGI
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Long-term appreciated assets: Up to 30% of AGI
If deductions exceed AGI limits in a given year, unused amounts can typically be carried forward for up to five subsequent tax years.
Taxation of Beneficiary Distributions
Tax treatment of distributions varies by trust type.
Charitable Remainder Trusts (CRTs): Distributions to non-charitable beneficiaries are generally taxed under the CRT distribution ordering rules (often described as a four-tier system):
- Ordinary income
- Capital gains
- Other income
- Return of principal
Charitable Lead Trusts (CLTs): Tax treatment depends on whether the trust is structured as a grantor or non-grantor trust, and on the character of trust income.
Estate and Gift Tax Considerations
Assets transferred into certain charitable trust structures may be removed from the donor’s taxable estate, potentially reducing estate tax liability. If someone other than the donor or the donor’s spouse is named as a non-charitable beneficiary, the present value of that interest may be treated as a taxable gift, depending on the trust structure.
Unrelated Business Taxable Income (UBTI)
UBTI considerations depend on the trust type.
- Charitable Remainder Trusts (CRTs): UBTI may trigger a 100% excise tax, so trustees typically avoid investments that could generate UBTI, such as operating businesses or leveraged real estate.
- Other charitable trust structures: UBTI rules and consequences may differ depending on the trust’s tax classification.
Compliance and Reporting Requirements
Reporting obligations vary by trust structure.
- Many Charitable Remainder Trusts (CRTs) file Form 5227 annually to report financial activity and distributions.
- Beneficiary tax reporting (including whether a Schedule K-1 is issued) depends on the trust’s tax status and the nature of distributions.
Asset Strategy’s Charitable Wealth Planning Services
At Asset Strategy, we understand that effective charitable giving requires careful planning and strategic execution. Our services include:
- Personalized Charitable Planning
- Estate Planning Integration
- Tax Optimization
We invite you to schedule a 15-Minute Call with our team. This conversation will provide insights into how our services can be tailored to your unique needs.
Please note that tax laws and regulations are subject to change. Consult with a financial advisor or tax professional for the most current information and personalized advice.
Charitable Wealth Planning Disclosures:
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell investments.
Because investor situations and objectives vary this information is not intended to indicate suitability or a recommendation for any individual investor.
This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.
Charitable Remainder Trusts (CRT) is irrevocable and typically requires a donation of substantial assets. Legally, individuals no longer have control of the assets in the trust. Distributions from the CRT to the income beneficiaries might be taxable as ordinary income. Depending on the amount of assets donated, individuals may not be able to take the full tax deduction in the same year as the donation, however, it can be spread out over a five-year period.
Unlike a charitable remainder trust, a charitable lead trust is not tax-exempt. Trust income is taxed like the income of any other complex or grantor trust. CLT requires legal setup and likely ongoing maintenance costs, requires careful planning to ensure the trust can make its required payments during the trust term, and is irrevocable.
