Both of these trusts blend charitable giving with smart tax planning. But they work in opposite ways. The key question is: do you want to help charity first and your family second, or the other way around?
How Charitable Lead Trusts (CLTs) Work
A charitable lead trust pays income to a charity you choose for a set number of years. When that time ends, what is left goes to your heirs. This is often your children or grandchildren. Charitable lead trusts (CLTs) are built to reduce the gift or estate tax on the transfer to your family.
Here is the payoff. The charity gets the income stream first. So the IRS values the rest at a discount. That means lower transfer taxes when the assets reach your family. If the trust assets grow faster than the IRS assumed rate (the Section 7520 rate), your family gets more than expected. That extra growth passes tax-free.
A CLT is an irrevocable trust. Once funded, you cannot take the assets back. There are two types:
- Charitable Lead Annuity Trust (CLAT): Pays a fixed dollar amount to charity each year. This is the more common choice. It works well when interest rates are low.
- Charitable Lead Unitrust (CLUT): Pays a fixed percent of the trust's value each year. Payments change as the trust's value changes.
Some CLTs are set up as grantor trusts. This means the person who made the trust pays income tax on the trust's earnings. In return, they get a charitable deduction upfront. Non-grantor CLTs do not give an upfront deduction. The tax stays inside the trust.
How Charitable Remainder Trusts (CRTs) Work
Charitable remainder trusts (CRTs) flip the setup. You put assets into the trust. The trust pays you (or another beneficiary) income from the trust for a set time or for life. When the trust term ends, what is left goes to the charities you named.
You get a partial income tax charitable deduction in the year you fund the trust. CRTs work best when you hold assets that have grown a lot in value, like stock or real estate. The trust can sell those assets with no capital gains tax. It then reinvests the full amount and pays you income from a larger base.
CRTs also come in two forms:
- Charitable Remainder Annuity Trust (CRAT): An annuity trust that pays a fixed dollar amount each year. You cannot add assets after the first funding.
- Charitable Remainder Unitrust (CRUT): Pays a fixed percent of the trust's value each year. If the trust grows, your payments grow too. You can also add more assets over time.
The IRS requires the payout rate to be at least 5% and no more than 50%. The expected value going to charity must be at least 10% of your initial gift. This is called the "10% remainder test."
Side-by-Side Comparison
| Feature | Charitable Lead Trust | Charitable Remainder Trust |
|---|---|---|
| Who gets income first? | Charity | You (or your beneficiary) |
| Who gets the remainder? | Your heirs | Charities |
| Tax benefit | Lower gift/estate tax | Income tax deduction |
| Trust type | Irrevocable trust | Irrevocable trust |
| Best for | Passing wealth to family at lower tax cost | Getting income and helping charity |
Which One Is Right for You?
The choice depends on your goals:
- If your main goal is to pass wealth to your family while helping a cause along the way, a CLT is often the better fit. The charity benefits during the trust term. Your heirs get what is left, often at a big tax discount.
- If you want income for yourself in retirement and plan to leave the rest to charity, a CRT makes more sense. You get a current charitable deduction, steady income from the trust, and the peace of mind that the rest goes to a cause you care about.
Both types are irrevocable trusts. The choice is final once you fund it. Working with an estate planning attorney and a tax advisor helps make sure the setup fits your money picture and your giving goals.
The right charitable trust turns giving into a plan that helps everyone.