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Are Charitable Trusts Right for You?

There are many reasons why people donate to charity. While tax benefits may be important to some, altruism is far and away the leading impetus for giving away one’s assets. Donors may have a personal connection to a certain cause or simply want to be part of something meaningful, but the feeling they get from their benevolence is likely the driver of their generosity.

Luckily for such kind-hearted people, there are estate planning techniques that make fulfilling their charitable intent both tax-efficient and emotionally rewarding.

Charitable trusts

A charitable trust is designed to facilitate the donation of assets to a tax-exempt charity or nonprofit  organization of your choice, while providing certain tax benefits as well.  There are a few types of charitable trusts to consider, based on your objectives and circumstances.

  • Charitable lead trust – This type of charitable trust is irrevocable, so it cannot be revoked once established.  It’s called a “lead” trust, because the initial beneficiary is your charity or nonprofit of choice.  Income from the trust assets is distributed for a set period of time, after which the remaining assets revert back to the donor, their heirs, or beneficiaries named in the trust.The trust can be funded with a gift of cash or securities, which will produce the income distributed to the charity.  However, some of that income can come back to the donor, depending on their intent, and they can also benefit from deductions for gift and estate taxes.  In addition, the donor can take a deduction of up to 30% of their adjust gross income in the tax period that the trust is funded, and unused deductions can be carried forward to subsequent tax periods.
  • Charitable remainder trust (CRT) – Also irrevocable and funded with cash or securities, this trust operates differently from the charitable lead trust.  Here, the primary beneficiary is the donor or their heirs, who receive the income stream from trust assets for a set period of time, after which the remaining assets are distributed to the charity or nonprofit of choice.There are two kinds of CRTs: (1) a charitable remainder annuity trust (CRAT), which distributes a fixed amount to the donor and their heirs each year; and (2) a charitable remainder unitrust (CRUT), which distributes a fixed percentage of the trust value to its beneficiaries annually.  No additional contributions can be made to the CRAT, but they can be made to the CRUT.

Benefits of charitable trusts

  • The trust provides income tax benefits to the donor when the trust is funded.
  • For high-wealth individuals, donations to a charitable trust help reduce the value of their estates, thereby reducing the potential estate tax liability.
  • These trusts are tax-efficient methods of fulfilling charitable intent that provide benefits to both the charity and the donor.
  • By donating highly-appreciated assets, like stocks, ETFs and mutual funds, to a charitable trust, a donor may avoid paying capital gains taxes that would otherwise be due if these assets were sold.  Moreover, the fair market value of the donated assets, not the cost basis, is used for purposes of determining the appropriate tax deduction.
  • A charitable trust can provide an income stream to the donor or their heirs.

Downsides of a charitable trust

  • These trusts are generally irrevocable, so once they’re established they cannot be terminated if the donor’s circumstances change. This means that assets could be tied up in a time of unexpected need.
  • In the case of the CRT, the income enjoyed by the donor and their beneficiaries on the front end could reduce the value ultimately distributed to the charity. If the donor’s intent is to give more to their charity up front, they should consider the lead trust or a different vehicle altogether.
  • Funding the trust to accomplish both the donor’s charitable intent and desire to provide an income stream for themselves and their heirs may require more value than the donor is willing or able to commit.


A charitable trust can be a good option if a donor wants to create a legacy, or if appreciated assets need to be disposed of with tax-minimization in mind, all while generating income for the donor and their heirs. These trusts are probably not the best option if losing control of the assets or the cost and burden of ongoing maintenance of the trust (e.g., tax preparation) is a concern. Bottom line, they can be great tools in the right situation, so keep them in mind when you’re ready to support a worthy cause.


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This article is provided for educational purposes only and is not intended to be legal, financial, or tax advice. The information provided herein was accurate at the time of publication and is subject to change without notice. We recommend that you consult an estate planning attorney or a tax advisor to discuss how current laws apply to your situation.

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