Charitable Trust vs Charitable Remainder Trust: Key Differences Explained
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People often mix up a standard charitable trust with a charitable remainder trust, but each serves a very different purpose in a donor’s estate plan. Understanding how they work, who benefits, and the tax rules behind them can save you money and keep your charitable goals on track.
Key Takeaways
- A charitable trust is a permanent vehicle that gives income to a charity forever.
- A charitable remainder trust (CRT) provides income to non‑charitable beneficiaries first, then passes the remainder to charity.
- CRT income can be fixed (CRAT) or variable (CRUT), affecting payout calculations.
- Both trusts offer tax deductions, but CRTs also allow you to defer capital gains tax.
- Setting up either trust requires a written trust instrument, a trustee, and compliance with local tax authority rules.
Below we break down the two structures, compare their features side‑by‑side, and give you a step‑by‑step guide to get started.
What Is a Charitable Trust?
When people talk about charitable trust is a legal arrangement where a grantor transfers assets to a trustee to benefit charitable causes on a permanent basis, they’re referring to a trust that never dissolves. The grantor (the person who creates the trust) usually makes an irrevocable contribution, meaning the assets can’t be taken back.
The trustee manages the trust’s investments, distributes any income or gains to the designated charities, and must follow the terms set out in the trust document. Because the trust is irrevocable, the donor typically receives an immediate income‑tax deduction based on the present value of the charitable interest.
What Is a Charitable Remainder Trust (CRT)?
A charitable remainder trust is a split‑beneficiary arrangement that first pays income to one or more non‑charitable beneficiaries is a person or entity who receives payments from the trust during its term, then transfers the remaining trust assets to a charity when the term ends or the last income beneficiary dies.
CRTs come in two popular flavors:
- Charitable Remainder Annuity Trust (CRAT) is a trust that pays a fixed annual amount, calculated as a percentage of the initial trust value.
- Charitable Remainder Unitrust (CRUT) is a trust that pays a variable amount each year, based on a fixed percentage of the trust’s annually re‑valued assets.
Because the CRT holds the assets until the remainder goes to charity, donors can defer capital gains tax on appreciated assets placed in the trust.
Core Differences at a Glance
| Feature | Charitable Trust | Charitable Remainder Trust |
|---|---|---|
| Primary purpose | Provide ongoing support to one or more charities forever | Provide income to non‑charitable beneficiaries first, then to charity |
| Beneficiary types | Only charitable beneficiaries | Both income beneficiaries (individuals, trusts) and charitable remainder beneficiaries |
| Typical payout | All income/earnings go to charity (or reinvested) | Fixed (CRAT) or variable (CRUT) payments to income beneficiaries |
| Tax deduction timing | Immediate income‑tax deduction for the donor | Immediate deduction for the charitable remainder interest; plus capital‑gains deferral |
| Irrevocability | Irrevocable (once assets are transferred) | Irrevocable (once the trust is funded) |
| Control over assets | Trustee follows the charitable purpose; donor has no control after funding | Donor may name income beneficiaries and set payout rates, but cannot alter the remainder |
Tax Implications You Need to Know
Both trusts trigger an income tax deduction is a reduction in taxable income based on the charitable portion of the trust’s value. The deduction amount is calculated using IRS (or local tax authority) tables that consider the donor’s age, the payout rate, and the trust’s term.
Key points:
- For a charitable trust, the deduction equals the present value of the charity’s interest, typically up to 30% of the donor’s adjusted gross income (AGI).
- For a CRT, you can deduct the present value of the remainder interest (often 20‑30% of AGI) and also avoid immediate capital gains tax on appreciated assets placed in the trust.
- The income you receive from a CRT is taxed on a tiered basis: ordinary income, capital gains, tax‑free return of principal, and finally charitable remainder income.
Because tax rules differ between jurisdictions (e.g., the U.S. IRS vs. New Zealand’s Inland Revenue), it’s wise to run the numbers with a tax professional who knows the local nuances.
How to Set Up Either Trust - A Practical Checklist
- Define your charitable goal. Decide whether you want perpetual support (charitable trust) or an income stream before the gift (CRT).
- Select a trustee is a individual or institution responsible for managing the trust assets and making distributions according to the trust document. Common choices include banks, law firms, or trusted family members.
- Draft a written trust instrument is a legal document that outlines the trust’s purpose, beneficiaries, payout formulas, and termination conditions. Include precise language to satisfy tax‑authority requirements.
- Transfer assets into the trust. This can be cash, publicly traded securities, real estate, or a business interest. For CRTs, appreciated assets are common because of the capital‑gains deferral benefit.
- Obtain a qualified appraisal (if non‑cash assets exceed the threshold set by the tax authority).
- File the required tax election forms (e.g., IRS Form 1023‑PE for charitable trusts, Form 5227 for CRTs) within the statutory deadline.
- Notify the charitable beneficiaries and, for CRTs, the income beneficiaries of their future interests.
- Maintain annual accounting, file the appropriate information returns, and keep detailed records of all distributions.
Pros and Cons - Quick Reference
Charitable Trust
- Pros: Permanent charitable impact; straightforward tax deduction; no ongoing income distributions to private individuals.
- Cons: No income for the donor; assets are locked forever; less flexibility if your charitable goals change.
Charitable Remainder Trust
- Pros: Provides income to you or your loved ones; defers capital gains tax; still leaves a sizeable gift to charity.
- Cons: More complex administration; payout rates must meet minimum IRS/Revenue requirements; remainder interest may be smaller if high payouts are chosen.
Common Mistakes to Avoid
- Funding the trust with assets that have high debt or low liquidity - the trustee may struggle to meet payout obligations.
- Choosing a payout rate that’s too low, which can trigger IRS challenges that the remainder interest isn’t charitable enough.
- Neglecting to update the trust instrument when laws change or when your charitable priorities evolve.
- Skipping professional appraisals, leading to inaccurate tax deductions and potential penalties.
Frequently Asked Questions
Can I change the charitable purpose after the trust is created?
For a standard charitable trust, the purpose is generally fixed because the trust is irrevocable. You can amend the trust only if the instrument includes a built‑in amendment clause and the amendment does not lessen the charitable interest.
Do I have to be a NewZealand resident to set up a charitable trust?
No. Non‑residents can establish a trust that benefits NewZealand charities, but they must comply with local tax rules and may need a local trustee or registered charity partner.
How is the charitable remainder value calculated?
The remainder value is the present value of the assets that will ultimately go to charity, calculated using IRS/Revenue actuarial tables based on the chosen payout rate, the trust term, and the donor’s age.
What happens to the trust if the income beneficiaries die early?
If a CRT’s term is based on the life of an income beneficiary and they pass away, the trust terminates early and the remaining assets transfer to the charitable remainder beneficiary immediately.
Is a charitable remainder trust considered a charitable organization?
No. The CRT itself is a trust, not a charitable entity. Only the remainder interest that goes to a qualified charity qualifies the trust for tax‑deduction purposes.
Understanding whether a charitable trust or a charitable remainder trust aligns with your financial and philanthropic goals can make a huge difference in both the impact you create and the tax advantages you capture. If you’re ready to move forward, start by drafting a clear trust instrument and consulting a qualified attorney or tax adviser who knows the local rules. charitable trust planning is a powerful way to turn your assets into lasting goodwill.
