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4 Types of Charitable Trusts (And How to Pick the Best One for You)

4 Types of Charitable Trusts (And How to Pick the Best One for You)

May 29, 2023

Many people want to leave a legacy when they pass. This often means leaving behind a generous gift to a charity of their choosing, but what is the best way to go about this? There are many ways to include charitable giving in your estate plan – starting with charitable trusts. 

This arrangement comes with a host of benefits, but there are different types of charitable trusts you should consider. Charitable remainder trusts and charitable lead trusts are the two main categories, which can be broken down into more specific types of charitable trusts.

Here is what you need to know about the types and which one may be the right move for your estate planning. 

Charitable Remainder Trusts

In general, charitable remainder trusts are simple to understand. You can fund this irrevocable trust with highly-appreciated assets to avoid taxation. In turn, beneficiaries receive payouts for their lifetime or a designated period.

After the period ends, the remaining balance is donated to charity. This charitable remainder must be at least 10 percent of the amount that was funded, as calculated at inception. 

There are two specific types of charitable remainder trusts you should be aware of: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). 

Charitable Remainder Annuity Trusts

Charitable remainder annuity trusts are an excellent option if you want to give your beneficiaries a set payment for the rest of their life or the term of the trust. A CRAT gives the same dollar amount payment year after year, even as the balance of the CRAT starts to change. This is great for those who want to give a dependable source of income.

One thing to note here is that there are no options for continuously funding a CRAT. After the initial funding, you cannot add any other assets to the trust. 

Charitable Remainder Unitrusts

A CRUT differs from a CRAT in two significant ways. Instead of giving a fixed payout to beneficiaries, they will receive a fixed percentage of the value of the trust. As the assets in the trust are depleted, the payouts become smaller. On the other hand, if the trust has experienced positive growth, the payments can increase.

It will not be a fixed source of income because of the natural fluctuation, but it can still be a great way to lend a little financial stability to beneficiaries with the tax advantages of opening a CRUT. 

Another major difference is the way you can fund the trust. In a CRAT, you can only fund the trust once upon opening it. CRUTs allow you to continue donating assets for a tax deduction over time. This type of trust is especially beneficial for donating real estate due to its flexibility surrounding when payments must begin. 

Charitable Lead Trusts

Charitable remainder trusts provide income to your beneficiaries and give the leftover funds to the charity of your choosing. If you prefer for it to be the other way around, then you may want to consider a charitable lead trust. As the name implies, this type of trust leads with distributions made to charity and whatever is left at the end of the trust term goes to your beneficiaries. 

Much like charitable remainder trusts, there are two types of charitable lead trusts: charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs). 

Charitable Lead Annuity Trust

The charitable lead annuity trust makes it easy for charities to understand exactly what funds they will have coming in year after year. After the CLAT term is set, the charity will receive fixed payments until the term ends or until the death of the grantor. After the term ends, the remaining assets will be given to a beneficiary. 

Charitable Lead Unitrust

As you may have already guessed, the charitable lead unitrust is similar to the charitable remainder unitrust but has a few things that are different – namely, the way that payouts are made. Instead of the fixed amount in CLATs, CLUTs will give a percentage of the unitrust’s value to the charity of your choosing year after year. 

Once the term has finished or the grantor passes, charitable payments are no longer made and the remainder of the trust is distributed to your beneficiaries. 

Which Type of Charitable Trust is Right for You? 

Now that we have taken the time to explore the types of charitable trusts, it is time to get down to business and discuss which one is right for you. The truth is that it depends on your goals, the financial situation you find yourself in, the types of assets you intend to donate, and more. It is a highly personal decision that takes a great deal of consideration. 

Charitable remainder trusts are great for ensuring payouts to your beneficiaries, setting them up with tax-sheltered inheritances. The charity of your choosing can still benefit, but it will not receive the gift until the end of the term. On the other hand, you can donate to charity first and foremost with a charitable lead trust. 

It is also important to think about how you want to fund your trust. If you want to add all of your assets upfront, then a CRAT or a CLAT might be the right fit for you. At the opposite end of the spectrum, you can continue to donate assets throughout your lifetime with a CRUT or a CLUT. Be sure to think through whether you want the trust to grow over time, or to drain it like a sinking fund.

Get a Trust Started Today With Magellan

Deciding which types of charitable trusts are beneficial for your unique financial situation and your overall goals is a complex process. Each type of trust has its own benefits, but it depends on how you want to fund them and your overall goals for your estate. Magellan Planning Group can help you to determine which type of charitable trust may benefit you the most.

Allow our professionals to walk you through the process of opening and funding a charitable trust that makes the most impact for both a charity of your choosing and your beneficiaries. Schedule a free consultation with our team today to discuss what your options are.