CPA discusses Charitable Remainder Trusts and Charitable Lead Trusts | 2012

With charitable giving becoming popular as part of estate and/or retirement planning, here is an overview of the most popular charitable/retirement (Estate) combination Trusts. I think most of us want to know our retirement is appropriately funded before supporting a charitable cause.

“Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are mirror images of each other.”
-Gary Bode, Wilmington NC CPA

Both are irrevocable, split interest Trusts of less than 20 years duration. The split interests are a) some charitable institution and b) the donor (or the donor’s heirs). Both CRTs and CLTs come in two distribution variations: a fixed dollar annuity, and, a fixed percentage of the Trust’s fair market value, as primary pay out amounts. CRTs pay a fixed annuity amount (CRAT), or fixed percentage of the trust (CRUT), to the donor first, with the remainder going to charity. CLTs pay a fixed annuity amount (CLAT), or fixed percentage of the trust (CLUT), to the charity first, with the remainder going to the donor. A CRAT would be appropriate when guaranteed amounts are needed for retirement, or desired as bequests to heirs.

Potential tax benefits of CRTs and CLTs include:

• They are tax exempt at the Trust level.
• The donor receives income and gift tax deductions for the year of actual contribution.
• Low basis assets that have appreciated, like real estate that has increased in value, can be transferred into them and then sold without incurring any income tax.

Additional wording in IRS Revenue Procedure 2007-45, for CLTs, allows for increasing the annual annuity amount, or the percentage of the trust, to the charitable institution over the term of the trust. So the IPCLAT is an Increasing Payment Charitable Lead Annuity Trust. An article in the July 2010 Journal of Accountancy suggests an application of the IPCLAT is to allow growth of principal in the early years of the trust, with hopes of the economy improving.

The entire acronym jungle of split interest charitable trusts has one obvious concern for anyone considering them as a retirement vehicle: make sure your personal needs for retirement will be met before funding charitable concerns.

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