A Guide to Charitable Trusts
Are there important causes in your life that you would like to support even after you have passed away? By creating a charitable trust, you can control which assets will go to the charity of your choice. At Phelps LaClair, we help our clients develop sound estate plans so they can leave a meaningful legacy through charitable giving. Continue reading to learn about the different types of charitable trusts and determine which one may be right for you.
What is a charitable trust?
During estate planning, you can place the assets of your choice into a trust. You also appoint a trustee to manage and distribute those assets based on the instructions you leave behind. A charitable trust is a type of irrevocable trust designed specifically for charitable giving.
The beneficiary of a charitable trust is the organization of your choice, but you can also name other non-charitable beneficiaries who can benefit from the trust. Since charitable trusts are irrevocable, you cannot remove assets from the trust or change the beneficiary. However, unlike revocable trusts, the assets in an irrevocable trust are safe from lawsuits and creditors.
What are the different types of charitable trusts?
Charitable Remainder Trust
If you plan to leave assets to other beneficiaries and wish those distributions to take priority over your charitable donation, you will need to set up a charitable remainder trust (CRT). CRTs are also known as a type of “split-interest” trust that divides the trust assets into income interest and remainder interest.
The income interest refers to any income earned by the assets in the trust since its creation. The beneficiaries receive the income yearly as a fixed dollar amount or as a percentage of the assets. The remainder interest is made up of the trust’s principal, which is the value of the assets themselves, including increases or decreases in value. The income interest goes to the non-charitable beneficiaries and the remainder interest goes to the charity.
Advantages of a CRT
You can name yourself as one of the non-charitable beneficiaries of a charitable remainder trust. This allows you to receive income from the assets held in the trust during your lifetime. Because of this, CRTs are a great way to plan for retirement while still being able to make charitable donations. If you have a high-appreciating asset, placing it in the trust will also reduce your income taxes via a charitable income tax deduction.
Disadvantages of a CRT
Charitable remainder trusts work best if you plan to make substantial contributions to the trust. Low-appreciating assets won’t offer much tax benefit and may not provide enough income to benefit the charity in the future. Another issue with CRTS is that high-income payments lead to more significant reductions in the principal value. This means that the charity will receive less in the future.
Charitable Lead Trust
If you would like to donate a specific portion of the trust’s income to the charity before any other distributions, then a charitable lead trust (CLT) is the right choice. A CLT is the direct opposite of a charitable remainder trust—the beneficiaries will receive any remaining funds in a CLT after distribution to the charity. However, similarly to a CRT, assets in a CLT can also potentially qualify for a tax deduction.
Estate Planning with Trusts in Arizona
At Phelps LaClair, our team has over 40 years of experience in helping Arizona residents create different types of trusts for charitable giving or other purposes. We would be happy to answer any questions you have about charitable trusts and how to set one up. Call 480-892-2488 today to schedule a consultation with our estate planning experts.