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Financial Planning > Charitable Giving > Charitable Giving Deductions

Does a Charitable Trust Make Sense for Your Client?

By Roger Wohlner

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What You Need to Know

  • A charitable trust offers your clients a vehicle they can use to contribute to a charity and receive tax benefits in return.
  • Charitable trusts may also offer an additional source of income for your clients and their beneficiaries.
  • The Secure Act 2.0 contains a provision allowing a one-time $50,000 QCD that can be directed to either a charitable remainder trust or a charitable gift annuity.

A charitable trust is a vehicle that allows your clients to donate assets to a charity or other nonprofit and receive certain tax benefits in the process. Charitable trusts can also offer your clients and their beneficiaries a stream of income over time that will vary based on the type of trust arrangement. 

The Setting Up Every Community for Retirement Enhancement (Secure) 2.0 Act could make certain types of charitable trusts more attractive to clients.

There are two main types of charitable trusts: a charitable remainder trust and a charitable lead trust. 

Charitable Remainder Trusts

A charitable remainder trust (CRT) is an irrevocable trust that is funded with a donation of cash, publicly traded securities, real estate, some types of closely held stock and other assets. Donating appreciated assets such as stocks, ETFs and mutual funds allows the donor to avoid paying capital gains taxes on these assets. 

A CRT is a split-interest trust. The donor receives a partial tax deduction for the assets donated to the trust. This is based on the trust assets that will ultimately revert to the trust’s charitable beneficiaries. They can name themselves and/or other non-charitable beneficiaries to receive an income stream for 20 years or for the life of one or more of these beneficiaries. After that, the remaining assets revert to the charitable beneficiary of the trust.

There are two versions of a CRT: 

  • Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year. Additional contributions to the trust are not allowed.
  • Charitable remainder unitrusts (CRUTs) distribute a fixed percentage of the trust balance, which is recalculated each year. Additional contributions to the trust are allowed. 

A charitable remainder trust is a good option for clients who want an immediate charitable deduction but would also like to create an income stream for themselves or other beneficiaries. This can help create an income stream in retirement for your client. 

A CRT can also provide income for beneficiaries without giving them control of the assets in the trust. This can be a good solution in cases where clients are concerned about giving a lump sum to beneficiaries but do want to provide an income stream for them.

Assets donated to a CRT will generally not be part of your client’s estate upon their death, which can be an important benefit as the estate and gift tax exclusion shrinks in 2026. 

Charitable Lead Trusts

A charitable lead trust works in an opposite fashion from a CRT. It is an irrevocable trust funded with a donation of cash, securities or other assets. With a charitable lead trust, payments are made to one or more designated charities over a set term with the remainder then reverting to non-charitable beneficiaries, such as the donor or other family members. A charitable lead trust can be funded during the donor’s lifetime or upon their death through a trust or their will. 

The term “lead” refers to the charity’s lead interest in the trust, which refers to the charity’s right to receive payments before the non-charitable beneficiaries for the term specified in the trust. 

There are two versions of a charitable lead trust that your clients can consider: 

  • Grantor charitable lead trust: Under this arrangement, your client as the grantor of the trust can take an immediate tax deduction for the present value of the payments that will be made to the charitable organization. This is subject to any limitations pertaining to the charity’s status as either a public charity or a private foundation. However, this upfront deduction is offset by the fact that the income from the trust is taxable to the grantor during the term of the trust.
  • Non-grantor charitable lead trust: Under this arrangement, the trust, not the grantor, is considered to be the owner of the assets in the trust. Since your client as the grantor does not own the trust assets, there is no immediate tax deduction available to them. Rather, the trust pays any taxes on undistributed net income, and it is able to claim an unlimited charitable tax deduction for the distributions made to the charitable beneficiaries. This structure offers greater advantages when it comes to gift and estate taxes. 

Both types of charitable lead trusts can be structured as reversionary, meaning that the trust assets revert to the grantor, or as non-reversionary, meaning the trust assets will be distributed to beneficiaries other than the trust grantor. 

A non-grantor charitable lead trust can be a good option for your client if their priority is the ability to pass appreciated assets to their non-charitable beneficiaries with reduced gift and estate taxes. The trade-off is that your client must be able to surrender access to those assets and any income they might generate during the term of the trust. 

A grantor charitable lead trust offers a current tax deduction, but income from the trust will be taxable to the grantor during the term of the trust. This might be a good solution for clients whose tax bracket is currently high but will decline in the future. 

Charitable Trusts and Secure 2.0 Act

The recently enacted Secure 2.0 Act contains a provision expanding the rules surrounding qualified charitable distributions (QCDs) from traditional IRAs. Those who are at least age 70 1/2 can transfer up to $100,000 a year from their IRA to a qualified charitable organization.

While there is no charitable deduction for QCDs, the distributions come out of the traditional IRA tax-free. The Secure Act 2.0 contains a provision that will index the $100,000 annual amount for inflation after the 2023 tax year. 

Secure 2.0 creates the opportunity for a one-time contribution to a new charitable remainder trust or a charitable gift annuity in the form of a QCD of up to $50,000. It is unclear as to whether this $50,000 is part of the $100,000 (indexed after 2023) annual QCD limit or a one-time addition to that limit. This will hopefully be clarified. 

Charitable Gift Annuities

A charitable gift annuity is a gift of cash or securities to a single charitable organization that in turn makes an annuity payment to the donor for the rest of their life. The size of the payment is determined by factors including the age of the donor when the annuity is established.

In some cases, the donor may be able to take a tax deduction for funding a charitable gift annuity with after-tax dollars. There would not be a charitable deduction if the charitable gift annuity was funded with payments from a QCD. 

The potential advantage to a client by making the QCD contribution to either a charitable gift annuity or a charitable remainder trust is that they are still contributing to a charitable organization with the QCD, but they are also creating income for themselves or other beneficiaries through the contribution. 

In the case of the charitable gift annuity, your client would receive annuity payments for their lifetime that are guaranteed. In the case of a CRT, your client or another non-charitable beneficiary would receive a stream of payments for a defined period, with the remainder of the trust assets then reverting to the charitable beneficiary.

Summary 

A charitable trust can be a good vehicle for generous clients who want a stream of income in a tax-efficient fashion. CRTs and charitable lead trusts can have different pros and cons based on your client’s situation. In looking at these options with a client, you will want to consider their current tax situation as well as any estate and gift tax implications. 

Charitable trusts can be complex vehicles. When suggesting this option to a client, it’s important to ensure that the charitable trust version chosen is the one most in line with your client’s goals and their situation. You will want to be sure to engage outside expertise in the estate planning and tax implications of funding the trust as needed. 

The Secure Act 2.0 option to fund either a CRT or charitable gift annuity with up to $50,000 of QCDs can be a solid option for many clients. It offers a vehicle to make a donation to a charitable organization and to receive a benefit from the charity in return. 

Roger Wohlner

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