How Does a Charitable Trust Work?

Getting involved in charitable work is a worthwhile venture, not just in a financial sense, but also in a moral sense. While looking out for your bottom line will always be the focus of your financial undertakings, charitable work is something that goes beyond profits and shouldn’t be forgotten. Charitable work is structured in such a way that helps the giver absorb the blow of giving away money, whether that be through tax breaks or increasing incomes. Today, the Davidson Law Group blog will focus on the charitable trust and how they work for the average citizen.

What Type of Charitable Trust are You Looking At?

There are two types of charitable trusts. With a charitable lead trust (CLT), the annual annuity stream, or lead interest, is put toward a qualified charity while the remaining interest is paid to the donor or their beneficiaries. A charitable remainder trust (CRT) is a mirror of the CLT, with the lead interest going to the beneficiaries and any remaining interest going to a qualified charity.

There are benefits to both of these forms of trusts, and while they mirror each other, those benefits aren’t all the same. The income on a CRT, for example, is tax-exempt while the income on a CLT is not tax exempt. With both trusts being tax deductible, the unique benefit of a CLT would be for clients who don’t want to give up control of their assets but still want a tax deduction.

How Do These Trusts Work?

Arguably the biggest differences between CLT’s and CRT’s is how they function in practice. While they may just be structured as the inverse of each other, the method of application is different. With a CLT, there are no annuity requirements. CRT’s typically require annuity to be at least 5% or no more than 50% of the trust’s assets, whereas those requirements don’t exist with a CLT. As noted before, CLT’s give you the ability to get a tax deduction without giving up control of your assets.

CRT’s are much different. With this type of charitable trust, assets are transferred to an irrevocable trust. Don’t be scared off by the word irrevocable, because CLT’s are also irrevocable. The difference is that CRT’s remove the asset in question from your estate. This means that you no longer have control of that asset, but it also means that estate taxes won’t be due when you die.

Which Trust Is Right For Me?

You can’t go wrong investing in a charitable trust, but there are better fits for each individual case. Whether you are someone looking to reduce estate taxes or someone looking for a tax deduction without losing control of your assets, Davidson Law Group has the answers. Contact us today at (817) 900-6529 if you are in the Fort Worth area or at (972) 591-6603 if you are in the Allen area, or visit our website for more information.