Use of Charitable Remainder Trust Versus Donor Advised Funds

Charitable Remainder Trusts (CRT) and Donor Advised Funds (DAF) are often recommended by financial advisors, attorneys, and accountants as useful tools for a client’s income tax and estate planning.

Below are descriptions of a CRT and a DAF, as well as explanations of how a donor might benefit from the use of each one or, possibly, both.

• Charitable Remainder Trust: A CRT is generally created by a client who has highly appreciated property, such as publicly traded stock, a business, or real estate. Instead of selling the asset and paying a significant amount of capital gains tax, the client donates the asset to a CRT and the trust sells the asset, leaving no capital gains to be paid by the client/donor. The trust does not pay any capital gains tax since the CRT is treated as a tax-exempt entity by the IRS. The CRT reinvests the funds from the sale into an income producing asset and the donor receives an annual predetermined income flow at a specific percentage of the value transferred or at a variable percentage based on the annual valuation of the assets. Generally, this amount is paid for the donor’s lifetime, and they report the income each year as ordinary income. In addition, the client receives a partial charitable tax deduction in the year of the gift based on an actuarially calculated percentage of the value transferred. Once the donor (or other recipients) dies, the remaining value is distributed to charity.
• Donor Advised Fund: A DAF is an account or trust that is held by a sponsoring non- profit organization, such as Stablish Foundation, which allows the client to take a full deduction of the assets transferred, subject to limitations under the Internal Revenue Code. Generally, the client “advises” the sponsoring organization which charities they would like to receive a gift. Normally, 5% of the annual value is given to the charities requested by the donor. Stablish Foundation vets the requested charities to determine whether they are acceptable legal recipients of the annual gifts. A DAF potentially can continue for a significant length of time, permitting the donor, even after their death, to support their requested charities, thereby creating a legacy for the donor. It is important to remember that the donor will not receive an income stream if the DAF is created during his or her lifetime.
• Combination of a DAF and a CRT: In many circumstances, clients will name a DAF as the recipient of the assets from a CRT at the time of their death, rather than naming a specific charity or charities. The benefit of this approach is the client/donor will receive an income stream during their lifetime and then a DAF is created at death to benefit the requested charities, creating a legacy for the donor.

Once a DAF is established after death, the original documents may name members of the donor’s family as the “advisor” to the fund in determining the charities receiving the annual gifts.

In Summary:

Finally, using a DAF in combination with a CRT provides the most flexible option, primarily because the charities can be changed until the death of the donor. In this instance, a professional adviser is critical in the creation of a plan for the donor in order to evaluate both the income tax and estate planning implications.

Stablish Foundation, a Community Foundation, can act as trustee for any type of charitable trust created by the donor and their professional advisors.