At Schultz Financial Group (SFG), we view wealth differently through our Four Capital approach. Our team works with you to build your wealth across Four Capitals – Financial Matters, Physical Well-being, Intellectual Engagement, and Psychological Space. This Financial Matters article focuses on using charitable trusts in estate planning.
Charitable gifting can be accomplished in many ways. Charitable donations, Qualified Charitable Distributions, and contributing to a donor-advised fund are all ways that individuals can gift to charities and receive some income tax deductions. Charitable giving can also be an effective estate planning strategy. For individuals with large estates, charitable remainder trusts or charitable lead trusts can provide both income and estate tax planning opportunities. We have included some information on both charitable remainder and charitable lead trusts below. We recommend discussing these options with your estate planning attorney and wealth advisor to ascertain whether these strategies are appropriate for you.
Charitable Remainder Trusts
A charitable remainder trust (CRT) provides an annual income stream to one or more noncharitable beneficiaries for a term certain, or for life. At the end of the income term, the remaining balance in the trust passes to charity.
If the CRT is established and funded during life, the grantor of a CRT will receive both an income and gift tax deduction in the year that the trust is funded. The deduction will equal the actuarial present value of the remainder interest that ultimately will pass to charity (subject to the percentage of AGI limitations). If the income beneficiary is someone other than the donor, the income interest will result in a taxable gift.
Charitable remainder trusts are exempt from income taxes. As such, it may be advantageous for the donor to contribute highly appreciated assets to the trust. This is an advantageous strategy as the trust will not pay capital gains tax if the assets are sold, the donor will receive a charitable income tax deduction, and the asset and its future appreciation will be excluded from the donor’s estate.
There are two types of CRTs: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). A CRAT makes fixed periodic payments to the noncharitable beneficiary. No additional contributions may be made after the initial contribution. Therefore, unless the principal is depleted, the beneficiary receives a known payment for the annuity’s duration. A CRUT is similar to a CRAT, except the noncharitable beneficiary’s periodic payment equals a fixed percentage of the fair market value of trust assets, determined annually. A CRUT may accept additional contributions if its trust instrument defines how the additional assets affect the valuation and calculation of its unitrust payments.
Charitable Lead Trusts
A charitable lead trust (CLT) is an irrevocable trust that provides income to a charitable beneficiary for a period of time, after which the property reverts to the grantor or another noncharitable beneficiary. The payment must be a fixed amount (CLAT) or a fixed percentage of the trust’s value, redetermined annually (a unitrust, or CLUT). A CLT is only useful when the donor does not require income from the charitable trust and can be created during the donor’s life or at death.
It is important to note the CLTs are not tax-exempt like CRTs. A charitable lead trust will pay tax like any other trust and the distributions to qualified charities from the trust are income tax deductible.
CLTs are flexible regarding the trust’s term and payout requirements: they have no minimum or maximum annual payout. Actual income over the required payment may be distributed to charity if the governing trust document permits this. Alternatively, the excess income may also be added to principal. The trust’s duration is not limited but must be determined when the trust is created. The longer the charitable term, the larger the charitable deduction. However, a longer term means the noncharitable beneficiaries must wait longer for their share of the assets.
Alyssa Yocom is an Associate Wealth Manager with Schultz Financial Group Inc.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.