Remainder vs. Lead Trusts
All charitable trusts have two types of beneficiary: (1) one or more individuals, and (2) one or more charities. In a Charitable Remainder Trust, the individual beneficiaries receive distributions over a preset term, and the charitable beneficiaries receive a distribution at the end of the term. In a Charitable Lead Trust, the charitable beneficiaries receive distributions over a preset term, and the individual beneficiaries receive a distribution at the end of the term.
Annuity vs. Unitrust Trusts
Both Charitable Remainder Trusts and Charitable Lead Trusts can be further broken down by how the distributions during the term are calculated. When the distributions are set as a fixed amount each year, the trust is an Annuity Trust. When the distributions are set as a fixed percentage of the trust assets each year, the trust is a Unitrust Trust. This leaves us with four primary types of charitable trust: Charitable Remainder Annuity Trust (CRAT), Charitable Remainder Unitrust (CRUT), Charitable Lead Annuity Trust (CLAT), and Charitable Lead Unitrust (CLUT).
Advantages & Disadvantages of Each
There are many nuances to charitable trust planning that can be navigated with an attorney to find the best fit for your needs. However, each type of charitable trust offers some general advantages and disadvantages.
A Charitable Remainder Trust allows you to provide income for yourself or for other loved ones during your lifetime. When planned for in advance, it can also help smooth out capital gains taxation from a large income event, such as the sale of a business. However, you can only take a partial charitable deduction in the year you gift assets to the trust and, since assets often come back to the gift-maker during the term of the trust, it is not as powerful of an estate tax avoidance tool. Further, the distributions are income taxed to the beneficiary.
A Charitable Lead Trust typically allows you to take a charitable deduction for the full amount of the gifted assets at the time you make the gift (subject to overall limitations on charitable deductions). Since a gift is not made to an individual until the end of the term, it can also be structured in a way that moves assets out of your estate without using your estate and gift tax exemption. A CLT is a particularly valuable estate planning tool when interest rates are low. However, a CLT does not distribute assets to your loved ones for many years and removes the assets, and any income they generate, from the gift-maker’s use and access.
A Unitrust Trust is a good fit where you anticipate the gifted assets will grow and want you or your beneficiaries to participate in the upside. However, a Unitrust Trust requires an annual valuation, which can be costly when dealing with illiquid assets. In addition, if the individual beneficiaries rely on the annual payment from the Unitrust, this is a risky strategy as the size of the payment could be lower than anticipated.
An Annuity Trust is best when you want to ensure a certain distribution regardless of the changing value of the underlying assets or when dealing with assets with no easily discernible fair market value. However, the fixed distribution amount in an Annuity Trust can unintentionally cut into the remainder value where the assets decrease in value or can miss out on an increase in value of the underlying assets.
