Navigating the world of charitable trusts

Key Points

Q: I would like to make some fairly substantial gifts to a number of my favorite charities. What are the differences among the various types of charitable trusts?

As long as certain requirements are met, the property is removed from your estate for estate tax purposes, and you receive a current income tax deduction for the present value of the remainder interest, transferred to the charity. The income distributions from the CRT to non-charitable beneficiaries, such as the donors or their family members, generally are received on a taxable basis.

A charitable lead trust (CLT) is basically the opposite of the CRT: The trust pays income to the charity for a specified number of years, and at the end of the term, the property is distributed back to you or another named beneficiary. The technique works well if you don't need the current income, but want to keep an asset in the family.

The income tax treatment differs depending on whether the asset reverts to you or goes to a beneficiary. If you hold the remainder interest, you'll receive a current deduction for the present value of the annual income to be paid to the charity. You'll also pay tax on the trust income, and the trust assets will remain in your estate. Other, more complex tax issues arise when someone else is named as beneficiary of the remainder interest, including possible gift tax ramifications.

If your intent is to make large donations, but also maintain some control over how that money will be used, consider forming a private family foundation. A foundation arrangement is particularly useful if you haven't yet determined which specific charities you want to contribute to. The increased control, however, comes at a price, as you must follow a number of rules designed to ensure that the private foundation serves charitable interests, and not private interests. For example, there are requirements on the percentage of annual payouts to charity and restrictions on most transactions between the foundation and its donors. Private foundations are also generally prohibited from benefiting any private individual.

Many larger public charities, particularly those that support a variety of charitable activities and organizations, offer donor-advised funds. Such a fund is simply an agreement between the donor and the charity in which the charity agrees to consider the donor's wishes regarding use of his funds. This agreement is non-binding, and the charity must exercise final control over disposition of the funds, consistent with the charitable purposes of the organization; otherwise, no income tax deduction will be allowed.

Before deciding which charitable giving vehicle is right for you, be sure to consider the administrative and legal costs associated with creating and managing it, and be sure to consult with both your tax and legal advisers in order to determine its feasibility for your particular situation.