Although dozens of types of trusts exist, the four most common are revocable, irrevocable, testamentary, and charitable trusts. While each has the same “three-parties plus assets” structure, they often serve different purposes, may go into effect at different times, and offer diverse benefits. In this blog, we discuss the ins and outs of charitable trusts. Check out our other blogs for details on testamentary, revocable and irrevocable trusts.

Charitable trusts

A charitable trust is an irrevocable trust where the grantor (now called the “donor” in these circumstances) transfers assets to an existing charity or to create a charitable foundation. The charity serves as trustee and is responsible for holding and investing the property. The donor can receive numerous benefits from a charitable trust, although to receive certain tax benefits, the charity must be an IRS-qualified, tax-exempt organization.

There are two types of charitable trusts.

The first is called the Charitable Remainder Trust (CRT). In this “split-interest” trust, the trustee pays the donor or another named person an annual percentage of the income the trust generates (an “annuity”), for a pre-determined period. Once this period ends, usually after the donor dies, the property transfers to one or more charities.

The second type of charitable trust, a Charitable Lead Trust (CLT), is considered the inverse of the CRT. In a CLT, the donor establishes the trust but retains control over the assets. The trust generated income goes to the charity or is divided between the charity and the donor’s beneficiaries. After the term period ends, the remaining trust assets flow to the beneficiaries of the donor’s choosing – usually non-charitable beneficiaries such as family members.

Charitable trusts allow you to help support a worthy cause while creating a lifetime income for you or your chosen beneficiaries. Such trusts can also give a significant income, estate, and capital gains tax break to heirs, beneficiaries, and, sometimes, to donors.

Don’t forget to check out our blog Estate Planning: What is a Trust? which covers the basics of trusts and how they can benefit you.