What are Charitable Lead Trusts (CLT) and Charitable Remainder Trusts (CRT)?

A CLT is a type of split interest trust where a charity has the initial interest in CLT property while the remaining property is either directly distributed to, or retained in a trust for, the non-charitable beneficiaries. A CLT uses interest rates and the charitable term to reduce the value of the taxable gift given to the non-charitable beneficiary. CLTs can be funded with cash and/or other assets including publicly traded stock, real estate, private business interests, and private company stock. There are two types of CLTs: Grantor CLTs and Non-Grantor CLTs. In a Grantor CLT, the donor remains the owner of the funds and takes an immediate tax deduction for all future payments to the charity. In the case of a Non-Grantor CLT, the trust own the funds instead of the donor and the donor is ineligible for an immediate tax deduction. Such a trust is required to pay tax on investment income but may take a tax deduction for the distribution of funds given to the charitable beneficiary. 

CLT’s are frequently used for estate or gift planning purposes. They have the potential to provide income tax deductions or estate and gift tax savings on assets passed down to the remainder beneficiaries.

A charitable remainder trust (CRT) is a split interest trust where during a specified initial period of time, one or multiple individuals have an initial interest in the property and usually receive trust distributions. Then, once that initial period is over, the remainder of the CRT funds goes to a pre-determined charity (or charities). Selected charities must be projected to receive at least 10% of the value of the initial gift to the CRT. These charities may be either public or private foundations and in some cases, the CRT trustee may retain the power to change the charitable beneficiaries during the initial term.  

The initial period can last for a term of up to 20 years or throughout the life expectancy of one or more non-charitable beneficiaries.  Distributions are typically made annually or quarterly but may be made weekly, monthly, or semi-annually as well. The IRS rules require the amount distributed be at least 5% but no more than 50% of the trust assets. It is acceptable for the CRT grantor to serve as a trustee but they may appoint a professional trustee instead. The CRT provides a steady stream of fixed payments which can be a helpful tool for planning for the future (such as retirement) and exerting a certain level of control over both sets of beneficiaries. The CRT also provides a partial tax deduction based on hypothetical growth rate and hypothetical income interest term based on actuarial life expectancies.

By donating the assets in-kind to a CRT, the donor can preserve their full fair market value and potentially take a partial income tax deduction when they fund the CRT, based on the assumed value at the time the charity assumes the remainder interest. CRT’s can also be used to diversify a portfolio, as an alternative to a stretch IRA for inherited retirement accounts, or to defer income for a beneficiary while they move from a high income state to a lower one. The income beneficiary of a CRT will be subject to income tax on any income received from the trust during their initial term. Significantly, however, the CRT investment income and any sale of CRT assets are tax-exempt.