A Charitable Lead Trust (“CLT”) is an irrevocable agreement in which a donor transfers assets to a trust that creates an income interest for a charity. Charitable lead trusts make payments annually for a pre-determined number of years to one or more charitable beneficiaries. This is the lead interest. Once participants reach the annuity period, the remaining funds or remainder interest return to the donor or pass on to other non-charitable beneficiaries.
Lead Trusts can be either Grantor, Non-Grantor, or a combination of the two.
A Charitable Remainder Annuity Trust (“CRAT”), is a Planned Giving vehicle that entails a donor placing a major gift of cash or property into a trust. The trust then pays a fixed amount of income each year to the donor or the donor’s specified beneficiary. When the donor dies, the remainder of the trust is transferred to the charity.
A CRAT has the following features, the donor:
- Receives fixed annual payments
- Pays no immediate capital gains tax on the transfer of appreciated assets
- Has a federal, and possible state, income tax charitable deduction
- And will reduce or eliminate estate taxes
A charitable remainder unitrust (“CRUT”) is an irrevocable trust created under the authority of Internal Revenue Code § 664 (“Code”) and has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequent basis) to a non-charitable beneficiary (which is considered the settlor of the trust); and (2) At the expiration of a specified time (usually the death of the settlor), the remaining balance of the CRUTs assets are distributed to charity.
The trustee determines the fair market value of the CRUT’s assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT.
Which is Right for You?
CRUTs are often considered for donors with a long life expectancy, because they need inflation protection and can usually assume more risk. By contrast, CRATs are often considered most appropriate for older donors who seek protection from market swings and to whom inflation protection is less important.
Another basic, but not to be overlooked, difference between an annuity trust and a unitrust is that it is generally simpler (and therefore less costly) to administer a CRAT than a CRUT. That is because an annuity trust payout need only be calculated once in the first year while unitrust payments must be calculated each year.
Another difference between the two types of trusts is that additional assets may be added to a unitrust but not to an annuity trust. For example, if you transferred stock to a CRT in year one and wanted to transfer additional shares of stock to the same trust in year two, you could do so with a unitrust but not with an annuity trust. If your trust were an annuity trust, you would need to establish a new CRAT for the additional shares.
This article is for informational purposes only and neither LPL Financial nor any of its representatives provide tax, legal or accounting advice.” Consult the appropriate professional to determine how this information applies to your unique situation.
About the Author: Charles Marsala is a LPL Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com