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They come with the funny abbreviations so common in estate planning—CRTs, CRUTs, CRATs, NIMCRUTs, CLTs, CLATs, CLUTs—but if you have significant charitable intent you should become acquainted with these versions of charitable trusts.

For all the many abbreviations, there are only two types of charitable trusts: charitable remainder trusts and charitable lead trusts. When the charity receives the benefit of your gift determines which type of trust. Let’s start with the lesser-known version, the charitable lead trust.

In addition to helping charity, the main benefit of a CLT is a reduction of the donor’s gift and estate taxes. The donor gifts appreciated property that is expected to generate income and the trust makes annual payments to a named charity or charities for a specific period, such as 10 or 20 years, or lifetime. When the period ends, the remaining trust assets pass to the trust’s beneficiaries, usually with a gift or estate tax savings. Obviously, this type of charitable trust is for donors who don’t need current income from the assets and who want to make an immediate gift to charity.

CLTs come in several variations. A charitable lead annuity trust (CLAT) pays out a fixed dollar amount to the charity set at the time of transfer of assets to the trust. There is no required minimum amount, but the amount will affect the size of the charitable deduction. The trust may need to dip into principal should the income be insufficient to make the fixed payments. In contrast, charitable lead unitrust (CLUT) payouts are based on a fixed percentage of the fair market value of the assets, recalculated annually.

These versions are further modified depending on whether it’s a grantor trust or a nongrantor trust. With a grantor trust, a portion of the assets may revert to the donor. The donor can take an upfront income-tax deduction, but has to pay taxes annually on all trust income paid out to the charity. 

With a nongrantor trust, the income generated by the trust is taxable to the trust, not the donor, but the trust receives a charitable deduction. The donor receives a charitable gift-tax deduction based on the value of the payments and how long the assets are to remain in the trust. Also, future appreciation of trust assets is removed from the donor’s estate and any gift or estate taxes due at the time of the trust termination may be reduced through a discount. 

Charitable remainder trusts are essentially mirror images of charitable lead trusts. They are designed for people who need current income or worry about running out of income during their lifetime, and who need income-tax deductions more than they need estate tax savings. 

The donated assets, which can be sold by the charity without a capital gains tax to the donor, typically are invested in diversified income-generating assets and the income is paid out to the donor. When the trust terminates, the remaining assets pass to the charity. The donor receives an upfront income tax deduction for the gift based on the donor’s age and the amount expected to ultimately go to the charity or charities. (If you name someone else besides yourself or your spouse as income beneficiary, the donation may be subject to gift tax.)

As with the charitable lead trust, a CRT comes in two flavors, but with very important differences. The annuity version (CRAT) must annually pay out an amount equal to at least five percent of the value of the initial donation. The percentage can be higher than what you’d get from a commercial annuity, though if it’s too high you’ll disqualify the trust. 

A unitrust version (CRUT) operates like the unitrust version of the CLT in that the percentage is initially set, but the trust value is recalculated every year, so the payout value will vary year to year. A variation of the CRUT is a NIMCRUT—net income with make-up charitable remainder unitrust. That mouthful means the trust must pay out all net income generated by the trust, and if it doesn’t pay it all out in a given year it has to make up the shortfall in subsequent years.

With either version of charitable remainder trust, the tax treatment of the income payout is determined by a complex “four tier” first-in, first-out accounting regime.