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As the year draws to a close, it’s a great time to review your financial and philanthropic goals.
For high-net-worth individuals, charitable trusts combine generosity with tax and estate planning. They deliver benefits beyond those of a direct donation or simple bequest — such as an immediate income tax deduction, potential capital gains deferral, estate tax reduction, income for a term of years or for life and the ability to leave a legacy for your heirs.
Charitable trusts in practice
Charitable trusts are split-interest vehicles, dividing a gift into two parts: an income benefit and a remainder benefit. This structure lets donors provide income for themselves or heirs, or leave a legacy to heirs, while ultimately benefiting charity.
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This dual-purpose design is what makes charitable trusts so powerful for affluent families.
The two main types of charitable split-interest trusts are:
Charitable remainder trusts. CRTs are ideal if you want income today while maintaining charitable intent. By placing assets like cash, mutual funds or appreciated securities into the trust, you can receive income during your lifetime and avoid immediate capital gains taxes. After your passing, the remaining assets go to charity.
Charitable lead trusts. CLTs are best if you want to prioritize charitable giving now and leave a legacy for your family later. The charity receives income first — typically for 10, 15 or 20 years — and then your heirs inherit the remainder. CLTs can also help reduce gift and estate taxes. There are two main types:
- Grantor CLTs. Provide an upfront income tax deduction, but you pay tax on trust income during the term. Assets are out of your estate, and the grantor gets a gift tax charitable deduction, so there are estate tax benefits.
- Non-grantor CLTs. No upfront charitable deduction; undistributed trust income is taxed separately from your personal income, yet the trust gets the deduction. Assets are removed from your estate, which can reduce estate taxes.
Each trust type suits different goals. Start by clarifying what matters most: steady income, maximizing charitable impact or preserving wealth for future generations.
Determining the right fit
Charitable trusts appeal to wealthy individuals who want to integrate philanthropy with advanced tax planning. Unlike a direct donation, these trusts can provide additional benefits beyond the charitable deduction.
Funding options are flexible (cash, securities or other assets), but donating appreciated assets offers the additional benefit of avoiding capital gains tax.
Once you’ve decided on a CRT or CLT, choose the payout method:
- Annuity trust. Fixed annual payout — predictable, but could deplete trust assets if returns lag.
- Unitrust. Variable payout — drops if markets fall, but the trust won’t run out because payouts are based on remaining assets.
Your choice depends on your cash flow needs, market outlook and overall objectives.
Tax and timing strategies
Tax benefits are a major reason wealthy investors choose charitable trusts over direct gifts. You may qualify for an immediate income tax deduction, defer capital gains and reduce estate taxes. CLTs may also offer estate tax advantages when transferring assets to heirs.
Planning ahead is critical because these trusts take time to set up and fund. Drafting documents, transferring assets and finalizing terms can be lengthy, so start early to ensure proper structure and maximize available tax benefits and work with a financial adviser and tax or trust professionals to align the strategy with your overall wealth plan.
Timing should be driven by your goals and your tax situation rather than the calendar.
Setting up a trust during a high-income year — such as after selling a business or property — can help offset taxes.
Interest rates also affect deduction and payout calculations, so consult with your adviser about the optimal timing.
A lasting legacy
Charitable trusts combine impact and tax efficiency, making them one of the most strategic ways to give. They allow you to support causes you care about while reducing taxes and preserving income or wealth for future generations.
They can also fit naturally into a broader estate plan, helping you balance charitable giving with family wealth transfer.
For affluent families, these trusts can serve as a cornerstone of multigenerational planning — providing income, reducing taxes and ensuring charitable commitments are honored.
Start with a clear vision of your goals and work with experienced professionals, including a financial adviser and tax or trust experts, to ensure your trust is structured correctly.
Your adviser can also help coordinate with legal and tax professionals to simplify the process.
Planning tools and modeling can help you determine the right funding amount and payout structure so your trust truly reflects your priorities.
With the right approach, you can turn your vision into reality, benefiting both your family and the charities that matter most.
Charitable trusts deliver both financial efficiency and meaningful impact, making them a powerful tool for affluent families planning for the future.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
