Understanding the Tax Implications of Charitable Trusts 

By Sheila Monachino, CPA

Balancing charitable objectives with sound financial planning can be rewarding yet challenging. For individuals who want to support causes they care most about while also benefiting from tax savings, charitable trusts offer a powerful tool. Understanding the tax implications is crucial to making informed decisions that align with both your charitable intentions and financial objectives. 

What Is a Charitable Trust? 

A charitable trust is a legal arrangement where you transfer assets into a trust managed by a trustee for the benefit of one or more charitable organizations. This approach not only allows you to contribute to meaningful causes but also provides potential tax benefits and aids in estate planning. 

1. Charitable Remainder Trusts (CRTs) 

With a Charitable Remainder Trust, you or your designated beneficiaries receive income from the trust for a specified period or for life. After this period ends, the remaining assets are transferred to the chosen charitable organization(s). CRTs can be structured in two ways: 

• Charitable Remainder Annuity Trusts (CRATs): Provide a fixed annual income based on the initial value of the trust assets. 

• Charitable Remainder Unitrusts (CRUTs): Offer income that varies annually, based on a fixed percentage of the trust’s assets revalued each year. 

2. Charitable Lead Trusts (CLTs) 

A Charitable Lead Trust operates inversely to a CRT. The trust provides income to a charity for a set term, after which the remaining assets are passed on to non-charitable beneficiaries, such as family members. CLTs also come in two forms: 

• Charitable Lead Annuity Trusts (CLATs): The charity receives a fixed annual payment. 

• Charitable Lead Unitrusts (CLUTs): The charity receives a variable annual payment based on a percentage of the trust assets revalued annually. 

Tax Benefits of Charitable Trusts 

Establishing a charitable trust can offer several tax advantages: 

• Income Tax Deduction: When you fund a charitable trust, you may be eligible for an immediate income tax deduction. The amount depends on the type of trust, the term of the trust and the projected income or remainder interest that will eventually go to charity. 

• Capital Gains Tax Avoidance: Contributing appreciated assets, such as stocks or real estate, to a charitable trust can help avoid immediate capital gains taxes that would arise from selling the assets outright. 

• Estate Tax Reduction: Assets placed in a charitable trust are removed from your estate, potentially reducing estate taxes for your heirs. 

It’s important to understand that the IRS has strict rules regulating these deductions and benefits. Calculations for deductions can be complex, involving present value assessments of the charitable interest. Working with a Davie Kaplan tax professional is essential in navigating these regulations. 

Potential Drawbacks 

While the tax benefits are attractive, there are considerations to keep in mind: 

• Irrevocability: Once assets are transferred into the trust, the decision is typically irreversible. You cannot reclaim the assets if your financial situation changes. 

• Administrative Responsibilities: Charitable trusts require ongoing administration, including annual tax filings and adherence to fiduciary responsibilities, which may incur additional costs. 

• Impact on Heirs: In the case of a CRT, the remainder goes to charity, which might reduce the inheritance for your beneficiaries. Conversely, a CLT provides for heirs after the charitable term but may have different tax implications. 

Is a Charitable Trust Right for You? 

To determine if a charitable trust is the right option for you, it’s essential to evaluate your goals and long-term estate planning needs. If you decide to proceed, the process involves several key steps. First, consult with your Davie Kaplan financial advisor and estate planning attorney to explore the best options for you. Next, select the trust type that best aligns with your income needs and charitable aspirations, whether it’s a Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT). You’ll need to designate beneficiaries, which may include both charitable organizations and non-charitable individuals. You’ll then fund the trust by transferring assets such as cash, securities, or real estate into it. Finally, implementing a management plan is crucial to ensure the trust’s assets are managed effectively to meet both income and growth objectives.  

How Davie Kaplan Can Help 

Navigating the complexities of charitable trusts requires careful planning and expert advice. At Davie Kaplan, our experienced team of financial advisors and tax professionals can help you determine whether a charitable trust is the right fit for your financial and philanthropic objectives. We’ll guide you through the process, from selecting the right type of trust to structuring it in a way that maximizes tax benefits while aligning with your long-term goals. 

Contact us today to learn more about how we can help you integrate charitable giving into your financial plan and create a meaningful legacy for the causes you care about.