The basic structure and operation of charitable trusts is relatively simple. The donor creates an irrevocable trust and transfers cash or other property to it. The trust has both charitable and non-charitable beneficiaries, and the benefits of the trust are divided between an income interest and a remainder interest. For a period of time chosen by the donor, income payments are made to the trusts income beneficiary(s), and at the end of the income period, the trust assets are transferred to the remainder beneficiary(s).

In the case of a charitable lead trust, the income payments are made to the charitable beneficiary(s), and at the end of the income period, the trust assets are transferred to the non-charitable beneficiaries (e.g., the donors children).

Under a charitable remainder trust, the income payments are made to the non-charitable beneficiary(s) (usually the donor), and at the end of the income period, the trust assets are transferred to the charitable beneficiary(s).

The income payments can be a stated percentage of the initial value of the trust assets, in which case the trust is called an annuity trust (a charitable lead annuity trust [CLAT], or charitable remainder annuity trust [CRAT]). Or, the income payments can be a stated percentage of the current value of the trust assets, in which case the trust is a unitrust (a charitable lead unitrust [CLUT], or charitable remainder unitrust [CRUT]).

In addition to providing financial support to charitable organizations, which can include a family foundation, charitable trusts also have significant tax advantages. The donor receives a current income tax deduction for a portion of the value of the assets given to the trust, and the transfer of assets will not result in any capital gains tax or alternative minimum tax to the donor.

Because the trust itself is tax-exempt, if the trust sells the contributed assets, it will pay no capital gains tax, thus resulting in more assets for investment to produce the income payments.

With a charitable remainder trust, the trust assets will not be subject to either federal gift or estate tax. In a typical charitable lead trust, the donor makes a taxable gift to the remainder beneficiaries, but the value of the gift is the discounted present value of the remainder interest rather than the full value of the assets. Also any growth in value of the trust assets during the income period will be sheltered from gift tax altogether.

-David A. Scott


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.