As part of your estate planning, you may want to incorporate some type of charitable giving to an organization that you support. There are many ways to go about doing this ranging from donor-advised funds to naming a specific charity in your will or naming it as a beneficiary. There are also the ever-popular charitable trusts which come in many forms depending on your specific needs and desires.
If you are considering a charitable trust, here is what you need to know about the key differences between a charitable remainder trust vs. a charitable lead trust.
Charitable Remainder Trust vs. Charitable Lead Trust
When it comes to charitable trusts, there are two popular methods that allow you to give to a qualified charity: charitable remainder trusts and charitable lead trusts. The two act as opposites so it is important to weigh the characteristics of both to determine which is right for you.
Charitable Remainder Trust
Charitable remainder trusts (CRTs) allow you or a beneficiary to receive a set income percentage for life or for a specific term. At the end of the term, the money remaining is sectioned off to the charity of your choosing. These types of trusts can be funded with liquid assets as well as those that are a little less liquid such as real estate, antiques, and more.
They provide a tax-efficient way to sell these assets and reap the benefits.
If you want to provide an income stream for yourself or a beneficiary in the immediate future, then a charitable remainder trust is often the preferred method to do so. As long as you reserve some funds for charitable giving at the end of the irrevocable trust (following the 10 percent rule), then there are some strong tax benefits to forming a CRT.
Charitable Lead Trusts
On the other hand, charitable lead trusts (CLTs) are the exact opposite of the CRT method. Instead of paying a beneficiary first and the remainder of what is left in the trust going to charity, it works the other way around. The charity will receive regular payments from the charitable lead trust for a specific term or until the death of the donor. What remains will be given back to the donor or to their beneficiary.
These CLTs are ideal for anyone who wants to capitalize on the tax benefits of giving to charity and wants to make a bigger impact on their community in the here and now. If you are currently making regular gifts to the charity of your choosing (or would like to start), then a charitable lead trust is often the best method for doing so.
How to Choose Between CRT vs CLT
Are you torn between whether a CRT or a CLT is the right move for your future finances? Both are tax-advantaged arrangements that are beneficial for reducing gift and estate taxes.
The good news is that there are some ways to determine which is the right move for you. Most often, the deciding factor is when you would like to make a donation to the charity of your choosing. In a CRT, it comes at the end of the account, whereas a CLT makes payments to the charity in the here and now.
A CLT makes it possible for you to routinely give to a charity of your choosing, though that charity is set in stone once you name them. These donations offer tax deductions for you as the donor, and the money you put into the trust is irrevocable.
On the other hand, a charitable remainder trust boasts impressive tax savings when it comes to capital gains, gift, and even estate taxes. If you want a steady stream of income in the present for the rest of your life or for a set term, then a CRT is often the way to go. It is easier for family members to navigate a CRT as the remaining funds upon your death are given to the charity you selected.
The charitable remainder trust annuity can be utilized in several different ways, though you should ensure that you remain within the legal bounds of what you can do with this arrangement.
Benefits of Charitable Trusts
No matter whether you decide to go with a CLT or a CRT, there are some common benefits to both. Understanding the trust payout rate is just one piece of the puzzle.
Here are some of the pros and cons of donating your money to a charitable trust:
- Reduces gift or estate taxes for beneficiaries
- Tax-sheltered for donation of assets (minimizes capital gains taxes)
- Prioritizes charitable giving with or without annuity payments in the moment
- Can donate illiquid assets as opposed to simply cash
- Irrevocable and difficult to change the terms of the account
- Must pay setup costs to start a charitable trust
Establish a Charitable Trust Today
Whether you decide that a charitable lead trust or a charitable remainder trust is the right type of vehicle for your charitable giving, you need professional help to get started. Magellan can help you to set up and manage a charitable trust of any type. We provide the help you need to create a legal trust, complete with financial and tax planning with long-term management of the arrangement you create.
Make every effort to protect your wealth and make a big impact on the charity of your choosing. Contact us today to set up a complimentary consultation to learn more about charitable remainder trusts vs. charitable lead trusts!
Tax services offered by Magellan Tax, LLC. Legal services offered by Magellan Legal, LLC. Tax and legal services offered separately from Cetera Advisor Networks LLC which does not provide tax or legal advice.