When it comes to estate planning, most people think about trusts first and foremost. A trust is a great way to protect your assets, save on taxes, and avoid probate, but there are several different types to choose from. Two of the most useful charitable trusts are the charitable lead trust (CLT) and the charitable remainder trust (CRT). In this article, we’ll take a look at the differences between a CLT and a CRT to help you decide which one is best for your situation.
What Is a Charitable Lead Trust?
A CLT is a type of irrevocable trust that you create during your lifetime which will distribute assets to your chosen charity during your life (think, the lead payments are to the charity). You specify which charities you want to receive payments from the trust and for how long and how much you want those payments to be for. Depending on how the CLT is structured, you may not receive an immediate tax deduction for the value of the assets transferred. If you choose to receive the deduction, then some of the assets will be potentially subject to estate taxes. If you don’t choose to receive the deduction, then the entire amount will not be subject to estate taxes. Also, depending on the type of CLT, you may or may not be taxed on the income of the trust.
The benefit of using a CLT is that your charitable donations are made from current income during your life, rather than from the proceeds of your estate after you pass away. This can result in tax savings for you, while also supporting a cause you care about. A CLT also requires that once the trust term has ended, the remaining assets will be distributed to your chosen beneficiaries, which could be anyone – such as loved ones. You will likely have to report a gift amount (the remainder amount) to the IRS, and file a gift tax return, but with proper planning you can “zero out” the gift amount. As such, these trusts are a useful tool both in income tax planning, estate tax reduction, and passing assets on to your chosen beneficiaries.
What Is a Charitable Remainder Trust?
A CRT is an irrevocable trust, similar to a CLT. Unlike a CLT, however, CRTs prioritize distributing assets to you and your chosen beneficiaries during your lives, and then give the remainder to a charity organization (think, the remainder goes to the charity instead of the lead payments). Because of this, CRTs are often used by individuals who want to provide for their families during life, but also leave a portion of their final estate to charity when they pass (or after a certain amount of years, which is a maximum of 20 years). With a CRT, a portion of the amount of assets transferred to the CRT is eligible for a charitable deduction.
The biggest drawback of a CRT is that the distributions to you and family members during life are taxed as income (typically either ordinary income or capital gains taxes). However, the assets transferred to the CRT are not subject to estate taxes upon death. Because of this, this type of trust is usually not the best option for individuals who are looking to reduce income taxes. Rather, this is a great strategy for those looking to reduce estate tax liability.
Ultimately, the choice between a CLT and a CRT depends on your unique situation and goals. If your primary concern is reducing your tax liability and leaving a legacy to your loved ones, then a CLT may be a better option for you. On the other hand, if you are looking to create a trust that can provide an ongoing source of income for you and your beneficiaries during life and reduce estate taxes, then a CRT may be a better fit for your needs. Both are a great option for the philanthropist who also wants to provide for loved ones. To get started on a CLT or CRT for your own estate, contact The Law Offices of Tyler Q. Dahl today.
Dahl Law Group
Latest posts by Dahl Law Group (see all)
- How are California Law Corporations Taxed? - December 19, 2024
