Many individuals living in Nashville, Tennessee choose to make charitable giving an important part of their estate plans. Motivations for such charitable giving include the desire to benefit a particular cause or organization as well as the receipt of significant income, gift, and estate tax benefits associated with such giving.
A charitable trust is a way to accomplish those objectives where your assets are set up in a way to benefit you, your beneficiaries, and a charity. There are two primary types of charitable trusts: charitable remainder trusts and charitable lead trusts. The main difference in these two types of trusts is how the income generated by the trust is allocated.
CHARITABLE REMAINDER TRUSTS
A charitable remainder trust is a trust arrangement where the donor retains an interest for herself or other beneficiaries prior to the charitable organization receiving its interest. The income generated in a charitable remainder trust is first allocated to the named beneficiary (or beneficiaries) according to a set amount determined at the time the trust is created. The remaining income is then distributed to a charitable organization. At the end of a fixed number of years, the remaining principal is distributed to the charitable organization. A donor may deduct the present value of the remainder interest the charitable organization is expected to receive for income tax purposes. The creator of a charitable remainder trust can decide how trust payments are made in two ways: a fixed annuity or a percentage of the trust’s assets.
CHARITABLE REMAINDER ANNUITY TRUSTS (CRAT)
Where payments are determined by a fixed annuity, the trust is generally called a charitable remainder annuity trust, or “CRAT” for short. With a charitable remainder annuity trust, the beneficiaries would receive a fixed dollar amount (an “annuity”) from the trust each year, and the remaining income would go to a charitable organization. A charitable remainder annuity trust must pay a minimum annuity of five percent (5%) of the initial value of the trust property, and no further additions made be made after the initial funding of the trust. The primary benefit of CRAT is the beneficiary would receive the same amount of income from the trust each year, regardless of the amount of income actually generated by the trust. Important things to consider when determining the annuity amount are: (1) higher payments will decrease your income tax deduction, and (2) high payments may diminish your principal balance, thereby leaving less income for the charity.
CHARITABLE REMAINDER UNITRUSTS (CRUT)
A charitable remainder unitrust, or “CRUT” for short, allows for the beneficiary to receive a fixed percentage of the trust’s assets each year. The primary advantage of the charitable remainder unitrust is that the trust’s assets are revalued annually, which allows the distributions to keep pace with inflation since the annual distributions will rise and fall with the value of the assets in the trust. Another advantage to the charitable remainder unitrust is that there are no restrictions on additional contributions. Similar to the charitable remainder annuity trust, a minimum distribution of five percent (5%) of the value of the trust property determined each year must be disbursed to the beneficiary. Because the trust’s value is reappraised each year, this trust vehicle is the more commonly chosen option by donors.
CHARITABLE LEAD TRUSTS
A charitable lead trust differs from a charitable remainder trust in that it makes annual income distributions to a charity for a term of years or for one or more person’s lifetimes, after which the remainder of the trust principal passes to individuals such as the donor’s children. A fixed amount of the trust’s yearly income is distributed to a charitable organization, and the remaining income can either go to a beneficiary or it can remain in the trust. The donor can receive an income tax deduction for the present value of the income that is predicted to pass to the charity over a number of years. Similar to the charitable remainder trust, the income interest must be in the form of a fixed annuity or a fixed percentage of the trust assets as the assets are reevaluated annually.
The primary motivation for individuals choosing to create a charitable lead trust is to donate money to an organization in the short term, and a set amount of annual income is not needed. Many donors choose to fund a charitable lead trust with rapidly appreciating assets so that, after termination of the charitable term, the assets can be passed on to children or grandchildren at reduced gift or estate costs.
An alternative to a charitable trust is a donor-advised fund. A donor-advised fund is a charitable giving program sponsored by a public charity that gives a donor an ongoing role in distributions even after the charitable contribution is complete. Donors make contributions held in separate accounts (bearing the donor’s name if the donor wishes), with each donor advising the charity on how and when the funds in his or her separate account should be distributed.
Donor-advised funds offer several different advantages. First, they offer the ability to claim the donor’s income tax charitable deduction the year the contribution is made, even though the distributions will be made over several years. This is particularly important if the donor is facing a year in which large income tax obligations are impending. Second, gifts of appreciated property made to a donor-advised fund are deductible at fair market value, while gifts of such property to a private foundation are limited to the donor’s tax basis in the property. Finally, the limits on the amount of taxable income that may be offset by a charitable deduction in a tax year are more generous for gifts to a donor-advised fund than for gifts to a private foundation.
CONSULT AN EXPERIENCED NASHVILLE CHARITABLE TRUST ATTORNEY
Understanding the nuances, advantages, and disadvantages of particular charitable trusts and instruments can be challenging and complex. It is important to seek Nashville counsel that has valuable experience and knowhow. It takes the guesswork out of management. If you are working on planning your estate plan, then Crow Estate Planning & Probate wants to have your back. We have years of experience in this tricky field and can help walk you through which options best fit your needs.