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Philanthropy
Investor Services Charitable Trusts
There are two basic types of charitable trusts: the charitable remainder trust (CRT) and the charitable lead trust (CLT). Both designate a current beneficiary and a "remainder" beneficiary. The current beneficiary receives an annual payment stream from the trust for a specified term, while the remainder beneficiary receives the assets left in the trust at the conclusion of its payment term.
Charitable Remainder Trust
A Charitable Remainder Trust is a tax-exempt trust that makes annual payments to a current beneficiary (typically the donor and/or spouse) for the term of the trust and leaves the remaining assets to charity (as remainder beneficiary).
Potential Benefits of the CRT
- Diversify a low-cost basis asset
- Avoid or postpone capital gains tax on the sale of the appreciated asset
- Receive a current income and gift tax deduction (by establishing the CRT during the donor's lifetime)
- Receive an estate tax deduction (if the CRT is established to take effect upon the donor's death)
- Maintain and possibly increase annual income
- Ultimately benefit a favorite charity or charities
Example of How It Works
- A donor transfers an appreciated asset into a CRT and names both a current beneficiary and a charitable remainder beneficiary.
- The trustee of the CRT invests the assets in a portfolio. No immediate taxes on capital gains are due if the appreciated assets are sold within the CRT.
- The donor receives a lifetime annual payout from the trust and an immediate possible income tax charitable deduction.
- The donor's selected charity (or charities) receives the remaining trust assets upon the donor's death.
Charitable Lead Trust
A Charitable Lead Trust makes annual payments to charity (as current beneficiary) for a designated term and leaves the remaining assets to a remainder beneficiary (typically family) at the end of the term.
Potential Benefits of the CLT
- Charity receives annual payments
- Reduce the gift tax cost of assets passing to heirs
- Reduce potential estate or gift tax liability
- Receive a current income and gift tax deduction (by establishing the CLT during your lifetime)
- Family receives assets and any appreciation free of estate and gift tax at the end of charity's payout term
- Receive an estate tax deduction (if the CLT is established to take effect upon the donor's death)
Example of How It Works
- A donor transfers an asset (preferably one expected to appreciate) to a CLT. He or she names a charity as the current beneficiary and family as remainder beneficiaries.
- The charity receives an annual payout from the trust, and family receives the remaining assets from the CLT at the end of the charity's payout term.
- The donor is treated as making a gift equal to the value of family's remainder interest in the trust.
- Family receives the remaining trust assets at the end of the charity's payout term.
- Either the donor or the trust must pay capital gains tax if the CLT sells trust assets.
Establishing a Charitable Trust
There are several issues to consider when establishing any type of trust. One of the most important is who to name as the trustee or co-trustee, since that institution or individual will be responsible for following the instructions in your trust document. Your advisor will work with a Trust Specialist to help you integrate charitable trusts into your financial plan and select a trustee. Call your advisor, or find the office nearest you.
Morgan Stanley Smith Barney LLC, its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matters(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
For more information, please contact your Financial Advisor.