A well-conceived charitable giving strategy can help individuals with philanthropic desires maximize their giving capacity by targeting specific tax breaks offered through the tax code.
A charitable trust is a powerful estate planning tool that enables individuals to pursue their philanthropic goals while achieving financial and tax planning objectives.
Two of the most common trusts are Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs). Though they serve similar purposes, they’re structured differently, catering to different financial goals and circumstances.
This article defines CLTs and CRTs while highlighting their differences and identifying who benefits the most from each. A clear understanding of these trusts will help you make informed decisions about incorporating philanthropy into your wealth management strategies.
If you’re interested in charitable trusts, please call ARQ Wealth at (480) XXX-XXXX to speak with one of our estate planning financial advisors.
What is a Charitable Lead Trust?
A Charitable Lead Trust (CLT) is an irrevocable trust designed to generate income for a charitable organization over a specified period.
At the end of this period, the remaining assets are distributed to non-charitable beneficiaries, typically family members or heirs.
The term “lead” refers to the charity benefiting from the initial income stream, while the remainder is distributed to others at the end of the trust term.
How a CLT Works
- Funding the Trust: The donor transfers assets (such as cash, securities, or property) into an irrevocable trust.
- Charitable Income Stream: The lead trust pays a fixed or variable income to one or more charitable organizations designated by the donor for a set period (e.g., 10–20 years or the donor’s lifetime).
- Remainder Distribution: At the end of the term, the remaining assets are distributed to non-charitable beneficiaries, such as children or grandchildren.
- Tax Benefits: The donor may be eligible for a charitable income tax deduction based on the present value of the charitable income stream. Additionally, assets transferred to the lead trust may reduce the donor’s taxable estate, potentially lowering estate taxes.
Types of CLTs
Grantor CLT: The donor retains the right to the remainder interest, allowing them to claim an immediate income tax deduction for the present value of future payments made to the charitable beneficiary. However, they may still be subject to income tax on trust earnings.
Non-Grantor CLT: A non-grantor trust is established as a separate tax-paying entity wherein the remainder interest is passed to others (e.g., heirs), and the trust itself claims a charitable deduction. A non-grantor trust is considered the owner of the assets for federal income tax purposes. The trust pays tax on undistributed net income and claims the income tax charitable deductions for its annual distributions to the charitable beneficiaries. This type is often utilized for estate tax planning purposes.
Example
A wealthy individual places $1 million in a CLT, directing 5% annual payments ($50,000) to a charity for 20 years.
At the end of the term, the remaining assets go to their children.
The donor receives an upfront tax deduction based on the present value of the charity’s income stream, and the assets may be partially or entirely removed from their taxable estate.
What is a Charitable Remainder Trust (CRT)?
A Charitable Remainder Trust (CRT) is an irrevocable trust that provides income to noncharitable beneficiaries (often the donor or family members) for a specified period, with the remaining assets going to a charitable organization.
The “remainder” refers to the charity receiving the assets at the end of the trust term.
How a CRT Works
- Funding the Trust: The donor transfers assets into the trust.
- Income Stream: The trust pays income (fixed or variable) to non-charitable beneficiaries, such as the donor or their spouse, for a set period (e.g., a term of years or the beneficiary’s lifetime).
- Charitable Remainder: At the end of the term, the remaining assets are distributed to one or more charitable organizations.
- Tax Benefits: The donor receives an immediate income tax charitable deduction based on the present value of the remainder interest designated for charity. Additionally, capital gains taxes may be deferred if appreciated assets are used to fund the trust.
Types of CRTs
Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount annually based on the fair market value of the assets when they are initially donated to the trust, regardless of the trust’s performance. This provides predictable income but no flexibility. With a CRAT, you can only fund the trust once upon opening it.
Charitable Remainder Unitrust (CRUT): Pays a fixed percentage of the trust’s value, recalculated annually. This allows income to fluctuate with the trust’s performance, offering potential growth. CRUTs allow you to continue donating assets for a tax deduction over time.
Example
An individual funds a CRT with $1 million in appreciated stock, directing 6% annual payments ($60,000 initially for a CRUT) to themselves for life. Upon their death, the remaining assets go to a charity. They receive an immediate tax deduction, avoid upfront capital gains tax on the stock, and enjoy income during their lifetime.
Key Differences Between CLTs and CRTs
While both CLTs and CRTs combine philanthropy with financial planning, their structures and outcomes differ significantly:
1. Beneficiary Order
CLT: Charities receive income first, and non-charitable beneficiaries (e.g., heirs) receive the remainder.
CRT: Non-charitable beneficiaries (e.g., the donor or family) receive income first, and charities receive the remainder.
2. Income Stream
CLT: The charity receives a fixed (annuity) or variable (unitrust) income stream during the trust term.
CRT: Non-charitable beneficiaries receive a fixed (annuity) or variable (unitrust) income stream, providing flexibility based on financial needs.
3. Tax Benefits
CLT: Offers an immediate income tax deduction for grantor CLTs and estate tax benefits for non-grantor CLTs. The deduction is based on the present value of the charitable income stream.
CRT: Provides an immediate income tax deduction based on the present value of the charitable remainder, plus potential deferral of capital gains taxes.
4. Trust Term
CLT: The term can be a fixed number of years or linked to the donor’s lifetime, with the remainder passing to heirs after the donor’s death.
CRT: The term can be a fixed number of years (up to 20) or the lifetime of the income beneficiaries, with the remainder going to charity.
5. Asset Appreciation
CLT: If the lead trust assets appreciate significantly, the remainder beneficiaries (e.g., heirs) benefit from the growth, potentially increasing their inheritance.
CRT: Assets that appreciate benefit the income beneficiaries through higher payments (in a CRUT) and the charity through a larger remainder.
6. Irrevocability
Both trusts are irrevocable, meaning the donor cannot change the terms or reclaim assets once the trust is established. However, that irrevocability affects different parties depending on the trust:
CLT: Locks in the charitable commitment, ensuring payments to the charity.
CRT: Ensures income to the noncharitable beneficiaries and a future gift to the charity.
Who Benefits from a Charitable Lead Trust?
CLTs are ideal for individuals with specific financial and philanthropic goals. The following groups are most likely to benefit:
High-Net-Worth Individuals
CLTs are particularly effective for those with significant estates subject to federal estate taxes (e.g., estates exceeding $13.6 million per individual in 2025). Donors can reduce their taxable estate by transferring assets to a CLT, potentially saving substantial taxes.
Donors with Long-Term Philanthropic Goals
CLTs benefit individuals who want to support charities during their lifetime but also wish to pass wealth to heirs. The trust allows them to make a meaningful charitable impact while preserving assets for future generations.
Those Expecting Asset Appreciation
If a donor expects the trust’s assets to grow significantly (e.g., through investments), a CLT can maximize the remainder for heirs, because the appreciation occurs outside the donor’s taxable estate.
Younger Donors
CLTs can benefit younger individuals who can commit to a long-term charitable income stream while ensuring their heirs receive the remainder later in life.
Example Scenario
A 50-year-old business owner with a $20 million estate wants to support a local hospital and reduce estate taxes. They establish a non-grantor CLT, funding it with $5 million and directing 5% annual payments to the hospital for 20 years. The remainder will pass on to their children. The trust reduces their taxable estate, provides a charitable deduction, and ensures a legacy for both the charity and their family.
Who Benefits from a Charitable Remainder Trust?
CRTs appeal to individuals seeking income during their lifetime and a charitable legacy. The following groups are most likely to benefit:
Retirees or Pre-Retirees
CRTs are popular among older individuals who want a steady income stream during retirement. The trust provides predictable or variable income, supplementing other retirement income sources.
Owners of Appreciated Assets
Individuals holding highly appreciated assets, such as stocks or real estate, can utilize a CRT to avoid immediate capital gains taxes. By transferring these assets to the trust, they defer taxes and receive income based on the assets’ value.
Philanthropically Inclined Individuals
CRTs are appealing for those who want to leave a charitable legacy but need income during their lifetime. The trust ensures a future gift to charity while meeting current financial needs.
Donors Seeking Tax Deductions
CRTs offer an immediate income tax deduction, which can be valuable for high-income individuals looking to offset taxable income in a given year.
Example Scenario
A 65-year-old retiree with $3 million in appreciated stock wants income and to support a university. They fund a CRUT with the stock, receiving 6% annual payments for life (initially $180,000 per year, adjusted annually). This approach allows them to avoid upfront capital gains taxes, claim a tax deduction, and ensure a future gift to the university.
Comparing Costs and Complexity
Both CLTs and CRTs involve setup and administrative costs, including legal and accounting fees.
Because they are irrevocable, careful planning and professional guidance are required.
CLTs may be slightly more complex for non-grantor setups due to estate tax considerations, while CRTs are often simpler for retirees seeking income. Donors should work with financial advisors, estate planners, and tax professionals to ensure the trust aligns with their goals.
Bottom Line
Charitable Lead Trusts and Charitable Remainder Trusts offer unique ways to blend philanthropy with financial planning.
CLTs prioritize charitable giving during the trust term, benefiting high-net-worth individuals and those planning for future generations. CRTs provide income to donors or their families, appealing to retirees and owners of appreciated assets.
By understanding the differences, individuals can choose the trust that best aligns with their goals, ensuring a lasting impact for both their loved ones and the causes they care about.
To learn more about how Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs) can fit into your wealth management strategy, ARQ Wealth offers extensive expertise and resources for estate planning and charitable giving. Our adviors provide insights into trust structures, tax benefits, and personalized planning options, empowering you to make informed decisions.
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