Special to the Philanthropy Journal

By Jeffrey D. Haskell, J.D., LL.M.

Many families have either a charitable remainder trust (CRT) or charitable lead trust (CLT), which enables them to donate generously to their favorite charities while providing immediate tax savings. Both vehicles have one drawback, however: They cannot carry out the family’s charitable intentions beyond the trust’s limited terms. The good news is that when a private foundation is established alongside either a CRT or CLT, you and your family can receive all the usual benefits of these trusts while retaining charitable control—potentially forever.

Let’s take a closer look at these two vehicles:

With a CLT, you contribute assets to a trust that makes annual distributions to charities that you specify for a stated number of years. After this period, any remaining assets pass to you (or others whom you designate) free of gift tax.

In a CRT, the charitable interests are reversed: You contribute assets to a trust that makes annual distributions to you (or others you specify) for a stated number of years or specified term (typically, the beneficiary’s lifetime). Then, any remaining assets pass to one or more charities. You enjoy an immediate charitable income tax deduction along with a lifelong cash flow.

The downside of both CRTs and CLTs is that they have a limited lifespan. Although the trust instruments can be, and often are, drafted to allow you and your family to control which charities will ultimately receive a charitable distribution from the trusts, that control is finite – limited either to the term of the trust or the lifetime of the trust’s beneficiary.

Family control over the charitable funds in a CLT or CRT does not have to end, however, if these vehicles are combined with a private foundation. The trust instruments may be drafted to permit or require charitable distributions to your private foundation so that you or your family can continue to control the charitable use of those funds for years to come. Moreover, a CLT or a CRT can be used to fund a private foundation immediately, even if the term of the trust will not end for many years; there’s no need to wait.

Here are examples of how both newly created and existing CLTs and CRTs can be used with a private foundation. (Note: Even if an existing trust does not appear to permit distributions to a private foundation, it may be possible to modify the trust so that it does.)

Example:  CLT Stretch

Upon his death five years ago, Robert donated $1,000,000 to a CLT with a 20-year term. The trustees of the CLT, Robert’s children, must pay out $50,000 each year to charities that they select. This means that over the next 15 years, the remainder of the CLT’s term, they will pay out a total of $750,000. At the end of the term, any remaining assets in the CLT will pass to the children. As each annual distribution is made, however, $50,000 of charitable dollars passes from the control of the family.

If the family would like to retain control over those charitable funds, the children could establish a private foundation now and have the CLT make the distributions to it instead of unrelated charities. By the end of the CLT term, not only will the children enjoy the remainder of whatever’s left in the trust, but they will also have a private foundation funded with at least $750,000 that they and their heirs can use to further their charitable interests in perpetuity.

Example:  CRT Stretch

Ten years ago, Alice created a CRT, which will make payments to her for life. After she passes, the trust will continue to make payments to one or more charities that Alice designates. The remainder value of the CRT at the time of Alice’s death will be approximately $750,000. Upon her death, those funds (or whatever actually remains in the CRT) will pass to her designated charities. However, Alice may prefer to have her family control those funds after her death or perhaps have that control start immediately.

If Alice wants family control to begin at her death, she can create a private foundation and name the foundation as the charitable remainder beneficiary of her CRT. The foundation will be funded with the remaining assets of her CRT at the time of her death, approximately $750,000.  Alice’s family can then control the charitable assets in the foundation forever.

Alternatively, if Alice wants that control to start immediately, she can create a private foundation, name the foundation as the charitable remainder beneficiary of her CRT, and then donate the balance of her lifetime interest to the foundation. This will “merge” the life and remainder interests, resulting in immediate termination of the CRT. The $750,000 of assets now in the CRT will immediately pass to her foundation where those assets can be used to support the family’s charitable objectives for many generations, and Alice will be able to claim an income tax deduction for the value of her donated life interest.

Next Steps

You can learn more about the unique capabilities of a private foundation through Foundation Source, the nation’s largest provider of comprehensive support services for private foundations. Thanks to the company’s innovative technology and the economies of scale offered by their outsourced services, it can be practical to start a foundation with as little as $250,000 in initial funding. Although Foundation Source can set up a new foundation quickly and easily (typically in just three business days), CRTs and CLTs are subject to unique regulations and requirements. We therefore recommend a consultation with a trusts and estate attorney.

Jeffrey D. Haskell, J.D., LL.M. is chief legal officer for Foundation Source, which provides comprehensive support services for private foundations.