Charitable trusts are tools used in estate planning to support charities while still benefiting family or personal financial goals. Two common types are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).
Although they sound similar, they serve opposite purposes. What are the differences between CRTs and CLTs?
What is a charitable remainder trust?
A charitable remainder trust first pays income to individuals — usually the person who set it up or their beneficiaries. These payments last for a set number of years or for the rest of someone’s life. Once the term ends, the remaining assets in the trust go to a chosen charity.
CRTs are often used when someone wants to support a charity in the future but still receive income now. They may also help reduce certain taxes on appreciated assets.
What is a charitable lead trust?
A charitable lead trust does the opposite. It gives income to a charity first, either for a fixed term or for the lifetime of a person. Once that period ends, the remaining assets go to family members or other non-charitable beneficiaries.
CLTs are sometimes used to pass wealth to the next generation at a reduced tax cost, all while helping a cause in the short term.
How the two trusts compare
The main difference lies in who gets the income first. CRTs benefit people first, then charities. CLTs benefit charities first, then people. Each has its own advantages depending on financial goals, tax considerations and charitable interests.
A person might choose a CRT if they want to secure retirement income and make a future charitable gift. A CLT might be more useful for those who want to give to charity now but still pass assets to their heirs later. Seeking legal guidance will help you choose the right trust for your purposes.
