What Is a Charitable Gifts Trust Fund?

A charitable gift trust is a legal arrangement allowing an individual to donate to a charity while achieving personal financial goals. These are irrevocable trusts, meaning they cannot be modified after creation. They provide a structured way to support a chosen charity and can offer financial benefits, such as an income stream or tax advantages, to the donor or their beneficiaries.

By transferring assets into the trust, the donor can create a lasting impact. The trust is managed by a trustee who invests the assets, with payment specifics depending on the type of trust established.

Core Charitable Trust Structures

Charitable trusts are categorized into two types that function as inverses of one another: charitable remainder trusts and charitable lead trusts. The choice depends on whether the donor’s goal is to receive an income stream now or to pass more assets to heirs later.

A Charitable Remainder Trust (CRT) provides an income stream to the donor or other non-charitable beneficiaries for a specified period. This term can be for a set number of years, not to exceed 20, or for the life of the beneficiaries. At the end of this term, the remaining assets in the trust are distributed to the designated charity, making it a useful way to supplement retirement income while planning a future gift.

CRTs have two subtypes. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount each year, determined when the trust is created. In contrast, a Charitable Remainder Unitrust (CRUT) pays a fixed percentage of the trust’s fair market value, which is recalculated annually. For example, a CRUT paying 5% on a $1 million trust that grows to $1.1 million would increase its payment from $50,000 to $55,000.

A Charitable Lead Trust (CLT) operates in the opposite manner of a CRT. With a CLT, a charity receives an income stream for a set term. After this period, the remaining trust assets are transferred to the donor’s heirs. This structure is used to transfer assets to the next generation with potentially reduced gift and estate tax implications.

CLTs have variations distinguished by tax treatment. In a grantor CLT, the donor is treated as the owner for income tax purposes, receiving an upfront deduction but also paying taxes on trust income. With a non-grantor CLT, the trust is a separate taxable entity, and the donor does not pay ongoing income tax on its earnings but may be eligible for a gift tax deduction.

Tax Consequences for the Donor

A financial incentive for establishing a charitable trust is an immediate income tax deduction in the year it is funded. This deduction is not for the full market value of the asset, but for the present value of the future gift the charity will receive. The calculation depends on the asset’s value, the payout rate, the trust’s term, and an IRS interest rate.

An advantage is the potential to avoid capital gains tax on appreciated assets. When a donor contributes property like stocks or real estate to a charitable remainder trust, the trustee can sell it without triggering capital gains tax. This allows the full pre-tax value to be reinvested, which can generate a larger income stream for the beneficiary.

These trusts are also effective estate planning tools. Transferring assets into an irrevocable trust removes them from the donor’s taxable estate, which can reduce federal estate tax liability. For a charitable remainder trust, the assets are excluded from the donor’s estate, while a lead trust can help preserve wealth for heirs.

Key Decisions and Required Information

Before forming a charitable trust, the donor must make several foundational decisions. These choices will be formalized in the trust’s legal documents and dictate its function. The primary decisions include:

• Choosing the appropriate trust structure, either a charitable remainder or a charitable lead trust, based on financial and philanthropic goals.
• Selecting the assets to fund the trust, such as cash, securities, or real estate.
• Identifying the income beneficiary who will receive payments and the charitable beneficiary that will receive the remainder assets.
• Defining the trust’s term, which can be a set number of years or the beneficiary’s lifetime, and its payout structure, either a fixed amount (annuity) or a fixed percentage (unitrust).
• Appointing a trustee to manage investments, make payments, and handle administrative duties. The donor may serve as trustee, appoint a family member, or hire a corporate trustee.

The Establishment and Funding Process

The establishment process begins with hiring a qualified attorney experienced in estate planning to draft the necessary legal documents.

The attorney drafts the formal trust agreement, which is the blueprint for the trust. This document incorporates all the donor’s decisions, including the trust type, beneficiaries, payout rate, term, and trustee. The agreement must be reviewed to ensure it reflects the donor’s intentions and complies with federal and state laws.

Next, the trustee must obtain a Taxpayer Identification Number (TIN) from the IRS. An irrevocable trust is a separate legal entity for tax purposes and requires its own identifier.

The final step is transferring assets into the trust. This involves legally retitling the assets from the donor’s name to the trust’s name. For example, stock ownership must be changed on the brokerage account, or a new deed must be recorded for real estate.

Ongoing Trust Administration and Reporting

After the trust is funded, the trustee has recurring responsibilities. These annual duties include prudently managing and investing trust assets, and accurately calculating and distributing payments to the income beneficiary.

The trustee’s role also includes record-keeping and tax compliance. They must track all income, gains, losses, and distributions to prepare the trust’s annual tax filings.

Each year, the trustee of a split-interest trust must file Form 5227 with the IRS to report the trust’s financial activities. Because charitable lead trusts are not tax-exempt, a Form 1041 may also be required to report the trust’s income.

The trustee must also provide a Schedule K-1 to each beneficiary who receives a distribution. This form details the beneficiary’s share of the trust’s income, deductions, and credits for use on their personal tax returns.