Planning Briefs

One popular tax planning idea is to set up a charitable remainder trust (CRT). Typically, it provides an income tax deduction for the present value of your charitable contribution while removing the assets from your taxable estate.

Depending on your circumstances, however, you might want to consider the opposite approach and set up a charitable lead trust (CLT).

With a CRT, you fund a trust with assets of your choice. The CRT pays out annual income to an "income beneficiary"—this can be you or another family member. After a term of a specified number of years or your lifetime, the assets that remain in the trust go to the designated charity.

The income tax savings are immediate. When you set up a CRT, you're entitled to a deduction for the present value of the remainder interest that will go to the charity, even though that transfer may not happen for years. If you put securities that have appreciated in value into the CRT, you'll never be taxed on that appreciation. This could help you minimize or eliminate gift tax liability on the assets transferred to the CRT. Finally, the assets in the trust won't be included in your taxable estate.

There are two basic versions of CRTs—the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). With a CRAT, the payment to the income beneficiaries must be a fixed amount equal to at least 5% of the value of the amount of your donation. A CRUT, in contrast, also requires an annual payment of a fixed percentage of the trust assets, but in this case the payment is based on their current fair market value.

To keep the assets in your family, you might opt for a CLT instead. In this case, the charity receives the annual income, but the remainder goes to the designated family members. As with a CRT, a CLT may be set up as a charitable lead annuity trust (CLAT) or charitable lead unitrust (CLUT).

Unlike with a CRT, a donation to a charitable lead trust normally won't entitle you to a current income tax deduction. However, if the CLT is structured as a grantor trust whose income is taxable to you, you may claim a deduction for the present value of the charity's interest. These rules are complex, so obtain expert advice.

A properly structured CLT will provide an estate or gift tax deduction for the value of the portion of the trust that's designated for charity. That often makes it possible to transfer a remainder interest to family members without large tax costs. Taking all relevant factors into account, family members may wind up with an amount close to what they would have received through a direct bequest of the assets.

CLTs are not for everyone, but this concept might suit your needs. Consult with your advisors about the opportunity.