For philanthropic clients, charitable giving can be an important part of gift and estate tax planning. Assets transferred for charitable purposes are not subject to estate or gift tax. In addition, subject to limitations, transfers to 501(c)(3) public charities, including donor-advised funds, and private foundations during life may also be eligible for an income tax deduction. Certain types of trusts, called split-interest charitable trusts, benefit charity and individual beneficiaries providing both gift, estate, and income tax savings.
Charitable Lead Trusts (also called CLTs) provide an upfront interest for charity over a term of years in the form of an annuity or unitrust payment, with the remainder passing to individual beneficiaries. A CLT that is a grantor trust provides an upfront income tax deduction for the grantor, and the grantor is responsible for paying tax on income earned during the initial term of the CLT. With either type of CLT, if the assets in the CLT grow in excess of the rate of return assumed by the IRS, the remainder passes to the non-charitable beneficiaries without gift or estate tax. A non-grantor CLT provides the same estate and gift tax benefits except that the grantor does not get an upfront tax deduction and instead the CLT pays its own taxes during the term, offset by a charitable deduction for the annual payments to charity.
Charitable Remainder Trusts (also called CRTs) pay an annuity or unitrust interest to non-charitable beneficiaries. CRTs can be particularly tax efficient when funded with a highly appreciated asset that is later sold. This is because CRTs are tax exempt trusts, and the gain is not taxed until it is distributed to the individual beneficiaries resulting in potentially significant tax-free deferral.
