If you are putting together an estate plan, you might feel torn between two goals: taking care of your family and giving to a cause you believe in. A charitable trust is one way to bring those goals together, but the details matter. The starting point is when your loved ones will need support and how charitable giving fits around those needs.
Selecting a split-interest structure
The two common split-interest arrangements allows a single pool of assets provide for family and charity. What separates them is the sequence:
- Charitable remainder trust (CRT): Pays you or other noncharitable beneficiaries first, either for one or more lifetimes or for a fixed period of up to 20 years. Once that payment period ends, the remaining assets go to a qualifying charity.
- Charitable lead trust (CLT): Pays a qualifying charity during a set term. Afterward, the remaining property passes to your family or other individuals.
Which arrangement fits depends in part on whether your loved ones need regular payments or an inheritance later. From there, the payout amount and duration can be tailored to your circumstances within the legal limits for each structure.
Providing for family beneficiaries
Once you settle on a structure, the next question is who you want it to support. Depending on the terms, your relatives benefit in the following ways:
- Children or grandchildren receive regular payments from a CRT
- Named beneficiaries receive the property left in a CLT after its charitable term ends
- A surviving spouse receives CRT payments as its sole noncharitable beneficiary, an interest that may qualify for the estate tax marital deduction
Because these trusts are irrevocable, you generally cannot revise your family’s benefits simply because their needs change.
Coordinating tax and administration
A charitable deduction is only part of the tax picture. With a CRT, that deduction reflects the current value of the charity’s future share, subject to applicable limits, while your family generally owes income tax on its payments. A CLT follows different rules: its terms determine whether you qualify for an income tax deduction and whether you or the trust pays tax on its earnings.
The trustee must also arrange required asset valuations, make payments on schedule and file the necessary returns. An attorney can work with your tax adviser to compare the financial consequences, address ongoing duties and coordinate the arrangement with your will and beneficiary designations.