Charitable Remainder Trusts vs. Charitable Lead Trusts: Options for Philanthropy in Greenville

For many individuals and families in Greenville, philanthropy is a deeply held value. The desire to support local charities, educational institutions like Furman University, or community organizations is often a key part of their legacy. While direct donations are a common way to give, more strategic and sophisticated tools exist to maximize the impact of your gift while also achieving specific financial and tax goals. Two of the most powerful are the Charitable Remainder Trust and the Charitable Lead Trust. Though their names sound similar, their functions are nearly opposite, and choosing the right one depends entirely on your unique circumstances and objectives.

What is a Charitable Remainder Trust (CRT)?

A Charitable Remainder Trust, or CRT, is a planned giving vehicle that allows you to donate assets to a charity while retaining an income stream from those assets for a specific period of time. It’s a strategy designed for individuals who want to make a significant charitable donation but still need income from their assets during their lifetime or for a set term.

How a Charitable Remainder Trust Works:

You create and fund the trust. You transfer assets, such as appreciated stocks, real estate, or other property, into the CRT.
The trust pays you (or a designated beneficiary). The trust pays you an income stream for a predetermined term, which can be your lifetime, the lifetime of another person, or a specific number of years (up to 20).
The charity receives the remainder. When the trust term ends, the remaining assets in the trust are distributed to the designated charity or charities.

This structure allows you to convert a highly appreciated, low-yield asset into an income-producing one without immediately triggering a capital gains tax. The donation to the trust also provides an immediate income tax deduction.

What are the Two Main Types of Charitable Remainder Trusts?

There are two primary types of CRTs, and the choice between them impacts the nature of the income you receive and the flexibility of the trust.

Charitable Remainder Annuity Trust (CRAT)

With a CRAT, you receive a fixed annual payment. This payment is determined when the trust is first established and must be at least 5% but no more than 50% of the initial fair market value of the assets placed into the trust.

Key Features of a CRAT:

Fixed Payments: The payment amount never changes, regardless of how the trust’s investments perform.
No New Contributions: Once the trust is established, no new contributions can be made.
Predictability: It offers a predictable income stream, which can be beneficial for financial planning.

The fixed nature of the payments means that in periods of high market growth, the remainder for the charity may increase significantly. However, in periods of poor performance, the trust could be depleted.

Charitable Remainder Unitrust (CRUT)

A CRUT provides a variable income stream. The payment is a fixed percentage (at least 5% but no more than 50%) of the trust’s value, which is revalued annually.

Key Features of a CRUT:

Variable Payments: The income you receive fluctuates each year based on the trust’s performance.
Flexible Contributions: You can make new contributions to the trust at any time.
Growth Potential: Your income payments and the charitable remainder can both grow if the trust’s investments perform well.

The variable payment schedule of a CRUT can offer a hedge against inflation, as payments may increase with market growth. There are also specific variations of a CRUT, such as the NIMCRUT (Net Income with Makeup Charitable Remainder Unitrust), which can be useful for planning around retirement.

What is a Charitable Lead Trust (CLT)?

A Charitable Lead Trust, or CLT, is essentially the reverse of a CRT. With a CLT, the charity receives the income stream first, and the remaining assets are eventually returned to you or passed on to your non-charitable beneficiaries, like your children or grandchildren.

How a Charitable Lead Trust Works:

You create and fund the trust. You transfer assets into the CLT.
The trust pays the charity. The trust provides an income stream to a charity for a specific term of years.
The remainder goes to your beneficiaries. When the trust term ends, the remaining assets, including any appreciation, are distributed to your non-charitable beneficiaries.

A CLT is a powerful tool for individuals with significant wealth who want to provide for a charity and transfer assets to their heirs with reduced gift or estate tax liability. This strategy is particularly effective in a low-interest-rate environment, where the appreciation of the trust’s assets can exceed the rate assumed by the IRS.

What are the Two Main Types of Charitable Lead Trusts?

Similar to CRTs, there are two types of CLTs, each with different payment and tax implications.

Charitable Lead Annuity Trust (CLAT)

In a CLAT, the charity receives a fixed annual payment. This payment is determined at the outset, and the amount does not change.

Key Features of a CLAT:

Fixed Payments: The charity’s income is a set dollar amount each year.
Predictable Charitable Gift: The charity knows exactly how much it will receive each year.
Growth to Beneficiaries: If the trust assets appreciate beyond the fixed annuity payments, all that extra growth goes tax-free to your non-charitable beneficiaries at the end of the term.

Charitable Lead Unitrust (CLUT)

A CLUT provides a variable annual payment to the charity. The payment is a fixed percentage of the trust’s value, which is revalued each year.

Key Features of a CLUT:

Variable Payments: The charity’s payments rise and fall with the trust’s performance.
No Tax Arbitrage: Unlike a CLAT, there is no opportunity for tax arbitrage because any appreciation in the trust assets is shared with the charity.
Best for Volatile Assets: This structure may be useful if you’re donating assets with a fluctuating value, as it can stabilize the charitable gift.

Key Differences Between Charitable Remainder Trusts and Charitable Lead Trusts

The names of these two trusts are a source of frequent confusion, but it helps to think of them as two sides of the same coin. The core difference lies in who benefits and when.

Who gets the income stream? A CRT pays you (the donor) and/or your beneficiaries first, while a CLT pays the charity first.
Who gets the remainder? With a CRT, the charity receives the remainder. With a CLT, your non-charitable beneficiaries receive the remainder.
Tax deduction timing: A CRT provides an immediate income tax deduction to the donor. A CLT’s tax benefits can be more complex. If it’s a “grantor” CLT, you receive an immediate income tax deduction for the present value of the stream of payments to the charity. If it’s a “non-grantor” CLT, the trust itself gets a deduction for the payments, and there are estate or gift tax benefits for the remainder that passes to your heirs.

The choice between the two boils down to your primary goal. Do you need an income stream for yourself during your lifetime while supporting a charity? The Charitable Remainder Trust is likely the right tool. Do you want to pass wealth to your family while also making a substantial charitable gift, potentially with significant tax savings? The Charitable Lead Trust may be the better option.

What Assets Can Be Used to Fund a Charitable Trust?

Both CRTs and CLTs are typically funded with assets that have appreciated significantly in value. Using appreciated assets, rather than cash, can be a particularly valuable strategy because it allows you to avoid the immediate capital gains tax that would otherwise be owed if you sold the asset yourself. The trust can then sell the asset tax-free and reinvest the proceeds.

Examples of assets commonly used to fund these trusts include:

Highly appreciated securities (stocks, bonds, mutual funds).
Real estate (investment properties, vacation homes).
Closely held business stock.
Other non-cash assets.

For residents in the Greenville area, this could mean using a commercial property downtown, a parcel of land in Travelers Rest, or a successful local business.

How Do These Trusts Impact Your Tax Situation?

The tax benefits of CRTs and CLTs are a primary reason for their popularity in sophisticated estate planning.

Tax Benefits of a Charitable Remainder Trust

Immediate Income Tax Deduction: When you fund a CRT, you receive an immediate income tax deduction based on the present value of the anticipated charitable remainder.
Avoided Capital Gains Tax: The trust can sell the appreciated assets you’ve donated without paying capital gains tax. This allows the full value of the assets to be reinvested for greater growth.
Estate Tax Benefits: The assets you’ve placed in the trust are removed from your estate, which can help reduce your estate tax liability.

Tax Benefits of a Charitable Lead Trust

Reduced Gift/Estate Tax: This is the main benefit of a non-grantor CLT. The value of the gift to your non-charitable beneficiaries is reduced for gift and estate tax purposes by the value of the payments to the charity. This allows you to transfer a larger asset to your heirs while using less of your lifetime gift and estate tax exemption.
Immediate Income Tax Deduction: With a grantor CLT, you, the donor, receive an immediate income tax deduction for the value of the income stream going to the charity, which can be useful if you’re in a high-income year.

Why is Legal Guidance Important in Setting Up These Trusts?

Establishing a Charitable Remainder Trust or a Charitable Lead Trust is a complex legal process that requires meticulous attention to detail. These are not simple documents; they must comply with strict IRS regulations to ensure the tax benefits are realized and the trust operates as intended.

An experienced estate planning attorney provides guidance by:

Evaluating Your Goals: We work with you to analyze your financial situation and philanthropic goals to determine whether a CRT or a CLT is the right tool for you.
Drafting the Trust Document: We draft the trust document to ensure it complies with all federal and state laws, including those specific to South Carolina.
Navigating Tax Implications: We collaborate with your financial advisor and accountant to model the potential tax outcomes and ensure the structure is optimized for your specific situation.
Coordinating with Other Professionals: We coordinate with your other professional advisors to ensure the trust fits seamlessly into your overall estate plan.
Ensuring Proper Funding: We advise on the most suitable assets to fund the trust, which is a key factor in maximizing the benefits.

A misplaced provision or a missed deadline can invalidate the trust and lead to unforeseen tax consequences, completely defeating its purpose. Legal guidance helps to prevent these costly errors.

Which Trust is Right for Me? A Scenario-Based Comparison

The best way to differentiate these trusts is to think about the primary motivation behind the gift.

Scenario A: The Income-Focused Philanthropist

Sarah, a retired doctor in Greenville, holds a portfolio of highly appreciated stock. She wants to support the Greenville Health System Foundation but needs a reliable income stream during her retirement years. She doesn’t want to sell the stock and pay a large capital gains tax.

The right choice: A Charitable Remainder Trust (CRUT or CRAT).
Why: She can donate the appreciated stock to the CRT, receive an immediate tax deduction, and get a steady income stream for the rest of her life. When she passes away, the remainder of the trust goes to the foundation as she intended.

Scenario B: The Legacy-Builder

David, a successful business owner in Greenville, wants to leave a significant inheritance to his children but also wants to support the Greenville Center for Creative Arts. He has a valuable piece of commercial real estate downtown that he wants to pass down.

The right choice: A Charitable Lead Trust (CLAT or CLUT).
Why: He can donate the property to a CLT for a set term of years. The trust will generate income for the Greenville Center for Creative Arts for that period. At the end of the term, the property and any appreciation will pass to his children with significantly reduced gift tax consequences.

The Power of Blended Philanthropy and Legacy Planning

For Greenville residents, CRTs and CLTs can be integrated into a comprehensive estate plan to meet personal needs, leave a family legacy, and support chosen charities. These trusts offer a tax-advantaged way to make a difference. Due to the complexities of these trusts and South Carolina law, an informed approach is essential. The De Bruin Law Firm provides expert guidance for real estate and estate planning, ensuring philanthropic and financial goals are precisely executed and legacies safeguarded.

If you are a resident in Greenville or the surrounding area considering a sophisticated charitable giving strategy, we are here to help you explore your options. Contact us today at (864) 982-5930 or message us online to schedule a consultation and begin the conversation about your charitable and estate planning goals.