Estate Planning Q&A: Charitable split interest trusts explained

For charitably inclined individuals, a split interest trust, such as a charitable remainder trust (CRT) or charitable lead trust (CLT) can be a valuable tool for charitable, estate and income tax planning. When strategically utilized, these trusts can offer significant advantages, including the ability to provide a beneficial interest to your loved ones while supporting charitable causes. A charitable deduction may also be available. 

What is a CRT and a CLT?

A CRT allows individual beneficiaries to receive a beneficial interest from the trust for a specified period, with the remainder going to a charity. On the other hand, a CLT provides a beneficial interest to a charity for a specified period, with the remainder going to your beneficiaries. The beneficial interests in these trusts are “split” between the interest during the term and the remainder interest. The term beneficiaries receive a cash flow stream for the duration of the trust, while the remainder beneficiaries receive everything left at the end.

Why would I choose a CRT vs. a CLT?

A CRT and a CLT both allow you to support your beneficiaries and charitable causes, but they serve different purposes. A CRT is ideal if you want or need a steady income stream, want to defer capital gains tax on appreciated assets, or want to support a charity in the future. A CLT is ideal if you want to support a charity immediately and transfer appreciating assets to your beneficiaries with reduced tax implications. Choosing between a CLT and a CRT depends on your financial goals, charitable intentions and estate planning needs.

Why would I select an annuity or a unitrust?

When setting up a CRT or CLT, you can choose between an annuity trust (CRAT/CLAT) and a unitrust (CRUT/CLUT). An annuity is a fixed dollar amount annually, providing predictable cash flow. A unitrust pays a fixed percentage of the trust’s value, recalculated annually. This means the cash flow can vary but can also grow if trust assets increase in value, offering some protection against inflation.

What are the potential downsides of split interest trusts?

• The federal income tax charitable deductions associated with split interest trusts may be limited.
• Split interest trusts must comply with somewhat complex provisions, and failure to comply can result in significant penalties. Excise taxes may also apply in certain circumstances.
• The administrative aspects can be burdensome, requiring careful tracking of income, distributions and compliance with specific tax rules.
• Certain split interest trusts are treated similar to private foundations, requiring avoidance of self-dealing, jeopardizing investments and excess business holdings, which can limit investment options and potentially reduce returns.
• You must file a gift tax return and (in most instances) obtain a professional appraisal to establish the value of the assets transferred for gift tax reporting purposes.

Is a split interest trust right for you?

In addition to a CRT and a CLT discussed above, there are other ways to structure a split interest trust to offer additional flexibility.  A net income with makeup charitable remainder trust (NIMCRUT) can be beneficial if you have fluctuating income needs or want to defer income until a later date. A flip charitable remainder unitrust (FLIPCRUT) is advantageous if you initially need lower or variable income but anticipate a future liquidity event that will allow for higher, more consistent income distributions. By understanding the requirements, advantages and potential downsides, you can make an informed decision about whether a split interest trust is right for your estate planning and income tax needs. As always, consult with your RSM US tax advisor to tailor a strategy that best suits your situation and goals.