What is a charitable trust and why would I need one?

Establishing a charitable trust is an altruistic and financially savvy move for individuals who want to support specific causes, create lifetime income opportunities and sidestep income-draining taxes.

A charitable trust, as defined by the IRS, is not tax-exempt, and its unexpired assets are used to support one or more charitable activities.

There are two types of charitable trusts: charitable lead trusts and charitable remainder trusts.

1. Charitable lead trusts. A charitable lead trust is generally established for a predetermined period (10 or20 years is common, Bankrate.com’s Julie Sturgeon notes). The charities or programs named in the trust receive interest payments from the trust principal over this period of time. When the period expires, the remainder of the trust is returned to a “non-charitable beneficiary” – usually you or your family.

“Estate planners recommend this track for people with substantial wealth to stash assets whose value will undoubtedly appreciate in the future,” Sturgeon writes. “This way, that increased value escapes any taxation in the donor’s estate.”

While a charitable lead trust helps you to avoid potential gift taxes and estate taxes, you don’t get the full suite of tax savings because you never fully relinquish control of the money. That’s why charitable remainder trusts can be much more comprehensive in terms of tax relief – although the principal invested, in this case, is truly donated.

2. Charitable remainder trusts. “A charitable remainder trust (CRT) is an incredibly effective estate planning tool available to anyone holding appreciated assets with low basis, like stocks or real estate,” Cathy Pareto, CFP®, AIF® writes. “Funding this trust with appreciated assets allows the donor to sell the assets without incurring a capital gain. CRTs provide investors with an efficient way to transfer appreciated property, benefit from the charitable income tax deduction and reduce estate taxes while still reaping the benefits of the underlying assets for income purposes.”

There are two kinds of charitable remainder trusts:

  • Charitable remainder annuity trusts (CRAT): Once established, this trust pays a non-charitable beneficiary an income for a period of years or a lifetime. When that period ends, the trust’s predetermined charity starts to receive the trust’s remainder interest, which it can either withdraw or allow to grow within the trust.
  • Charitable remainder unit trusts (CRUT): Similar to a CRAT but with two key differences – first, the donor can transfer more funds to the CRUT at any time; and second, the trust must pay out at least five percent of the original investment each year as income for either a set term or until the death of the beneficiary.

Charitable trusts are major investments that require, in many cases, hundreds of thousands of dollars to fully realize the income and tax benefits that the financial tool can provide. Northwest’s Investment and Trust division can help you understand your charitable trust options and provide you with the guidance needed to make decisions that have powerful, permanent implications for your family and your wealth.

“Charitable trusts hand you more flexibility to dictate who gets what, and you can even change your mind on the beneficiary, which you can’t do if you took the less complicated way out and wrote a check,” Sturgeon writes.  “The only thing you can’t do is dissolve the trust. It’s a legally inviolate lock box, which is why advisers drill their clients on contingency plans in case of stock market dips, company bankruptcies and other financial catastrophes. And it’s not to be confused with an investment vehicle - establishing a charitable trust won’t leave you richer than if you hadn’t given the money.”

Fourth quarter economic growth was revised lower with the previously slowdown from the third quarter’s gain of 5.0 percent. The primary reason for the downward adjustment was the inventory investment was significantly less than previously reported. Overall growth for 2014 was a relatively mild 2.4 percent, consistent with the pace of growth seen since the end of the recession in 2009.


To speak with an expert about charitable trusts, contact Northwest Trust Services today.