Charitable Needs Trust

Person explaining paperwork

A Charitable Trust is an Irrevocable Trust consisting of assets that a Grantor (donor) signs over or uses to create a charitable foundation which are held and managed by the charity for a specified period of time, with some or all of the interest that the assets produce going to the charity. 

Created by an Act of Congress in 1969, there are three types of Charitable Trusts:

  • Charitable Remainder Trust
  • Charitable Remainder Annuity Trust
  • Charitable Lead Trust

Charitable Trusts can help your favorite charity and give you a tax benefit at the same time. Considered a ‘split interest’ Trust, the assets are split between charitable and non-charitable beneficiaries, and must have enough assets to cover expenses and be able to provide benefit for beneficiaries.

A Charitable Remainder Unitrust (CRUT) allows the Grantor to donate appreciated assets to charity to avoid capital gains. You need at least $100,000 for a Charitable Remainder Trust. In return, the Grantor receives annuity payments which are tied to the percentage of fair market value of the donated assets. At passing, the remains of the Trust go to the charity you have set forth in the Trust. A Charitable Remainder Unitrust is irrevocable, and the recipient must be a charity to get the tax exemption. If the market goes down, so does the payment. 

A Charitable Remainder Annuity Trust (CRAT) also allows the Grantor to donate appreciated assets to charity to avoid capital gains. In return, the Grantor receives fixed annuity payments which are tied to a percentage of the fair market value of the donated assets at the time of the creation of the Trust. At passing, the remains of the Trust go to charity. A CRAT is irrevocable, and the payment is not subject to change, possibly losing purchasing power with no access to principal if you need more income in the future. In addition, to qualify for the tax exempt status, the annuity payments must last at least 20 years or for the life of the Grantor. The non-profit charity named in the Trust must have a recognized benefit and receive at least 10% of the initial fair market value of the assets when the Trust was created. This trust requires $100,000.

A Charitable Lead Trust (CLT) is set up by the Grantor with assets. The charity receives earnings for a specific period of time and the Grantor gets the remaining assets at the end of that time period, reducing the income to the Grantor and providing tax deductions. A Charitable Lead Trust is irrevocable with the Grantor having no access to the funds and the inability to change anything if there is a need for funds in the future. You need at least $250,000 to $500,000 to create a CLT. There is less incentive to utilize this type of Trust as a way to save inheritance taxes with the current rates for deductions ($12,000 per person and $11.2 million at the federal level).