Federal Gift and Estate Tax Planning- Part 7 of 7: Advanced Planning with Charitable Trusts

Using a Charitable Remainder Interest Annuity or Unitrust (CRATs/CRUTs) and Charitable Lead Trusts (CLTs)

Charitable Remainder Interest Annuity and Unitrust as well as Charitable Lead Trusts are vehicles for the charitably inclined that can provide significant income and estate tax benefits. Both charitable remainder trusts and charitable lead trusts are split interest trust where an annuity interest and a remainder interest are split among the grantor of the trust or other non-charitable beneficiaries and a qualified charity. 


Charitable Remainder Interest Annuity Trusts (CRATs) and Charitable Remainder Interest Unitrust (CRUTs) are the two types of charitable remainder trusts. In both, the grantor or their chosen non-charitable beneficiaries receive an income stream and at the end of the term, which can be no more than 20 years, a chosen qualified charity receives the remaining assets. A CRAT pays a fixed annuity payment each year whereas a CRUT pays a fixed percentage of the trust assets revalued each year and allows for additional contributions. At the end of the term, the assets are transferred to the public charity, private foundation, or donor advised fund. The IRS requires that the amount of the annual payments to the grantor or non-charitable beneficiaries be at least 5% but no more than 50% of the trust assets. 

The benefits of a charitable remainder trust are that the grantor gets a partial income tax deduction on the initial transfer to the trust, the assets within the trust are tax exempt, and an individual can transfer highly appreciated assets to the trust without triggering a taxable gain upon transfer or when sold within the trust. However, it should be noted that the annuity payments to the grantor or non-charitable beneficiaries are taxed as ordinary income, capital gains income, or other income.

Like QPRTs discussed previously, CRTs are ideal when the Section 7520 rates are higher. For one, a greater initial income tax deduction is received upon transferring assets to the CRT. The present value of fixed annuity payments to the non-charitable beneficiaries or grantor decreases as Section 7520 rates increase and, therefore, the assumed remainder interest to the charity increases.  Additionally,  the IRS requires that the charity receive at least an amount equal to 10% of the initial net fair market value of the property transferred to the trust.  It is easier to meet this threshold when the Section 7520 rates are higher because, again, the assumed amount to be received by the charity is greater.

Charitable Lead Trusts (CLTs)

Charitable Lead Trusts (CLTs) are the inverse of Charitable Remainder Trusts in that the grantor transfers assets to the trust and the public charity, private foundation or donor advised fund receives the annuity stream and the remaining balance at the end of the term (no maximum term for CLTs) is distributed to the grantor or non-charitable beneficiaries.  A CLT can be structured as an annuity trust with fixed payments or a unitrust with fixed percentage annual payments. CLTs are much more flexible than CRTs as there is no minimum and maximum annual payout to the charity or the 10% rule. However, a CLT is not tax exempt like a CRT. Depending on whether the trust is structured as a grantor or complex trust, the grantor can receive either an income tax deduction on the initial transfer or the trust can take an unlimited income tax deduction on the annual payments made to the charity which can lead to a higher remaining amount for the non-charitable beneficiaries. Finally, CLTs being the inverse of CRTs, they are more effective when the Section 7520 rate is lower because the present value of the annuity stream to the charity is higher and, therefore, the potential income tax deduction is greater. 

To learn more about estate tax planning, contact our office. 

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