How Charitable Trusts Can Help You Minimize Taxes

Margaret Zywicz, Trust Officer, First Republic Trust Company

September 9, 2015

Wealthy individuals and families that have philanthropic goals, yet want to maximize tax breaks along the way, may want to consider setting up a charitable trust. Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are two such options; each has its own benefits, rules and considerations—so it’s important to select the one that meets your specific goals. 

Because both CRTs and CLTs are irrevocable—meaning you can’t change the terms once they are established—it’s essential to work with an experienced advisor who can help you select the right type depending on your specific goals and ensure it is established correctly.

Charitable Remainder Trust

A CRT generates an annual income stream for you or a non-charitable beneficiary (such as a family member) with the assets remaining at the end of the trust’s term going to one or more nonprofit organizations of your choice. A CRT is typically funded with highly appreciated assets, such as real estate, shares of a business or securities. Once inside the trust, you can sell those appreciated assets without triggering immediate capital gains taxes. That money can be used to build a diversified investment portfolio with taxes spread over the term of the trust.

The annual income stream generated by a CRT can either be a fixed dollar amount or a fixed percentage of the trust, recalculated annually, but it must range between 5% and 50% of the trust’s initial fair-market value. That income can be paid over a term of up to 20 years or over the life of the non-charitable beneficiary who is receiving that income.

Another significant benefit of the CRT is that you receive an immediate charitable tax deduction for the estimated remainder interest in the trust that will eventually be donated to charity. How the trust is designed—such as the expected term of the trust and the size of the income stream—will of course determine the size of that upfront deduction.

Charitable Lead Trust

A CLT is essentially the reverse of a CRT. It produces an income stream for at least one charitable organization or private foundation for a specific term of up to 20 years or over your or another person’s life. Any remaining assets then either revert back to you or to another non-charitable beneficiary.

CLTs are less common than CRTs because they are often considered a tool for only the ultra-wealthy. Yet, they are useful planning tools for many affluent families because they can offer income tax, gift tax and estate tax deductions. One type of CLT can provide an immediate income tax charitable deduction. Another type offers a gift tax deduction at creation, allowing you to transfer assets to your heirs at a reduced gift tax cost. 

Establishing a CLT can be especially beneficial in a low-interest-rate environment like today, because the low “hurdle rate” used to estimate the value of the gift decreases the amount that your noncharitable beneficiaries are expected to receive.

The strategies mentioned in this document will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. Client’s tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.

©First Republic Investment Management, 2015