How charitable trusts can reduce your estate taxes

On Behalf of | Mar 21, 2024 | Estate Planning, estate tax

Estate planning is important for ensuring your loved ones get taken care of after you are gone.

One effective strategy is using charitable trusts. These options not only benefit charitable causes. but they can also significantly reduce the burden of estate taxes for you and your heirs.

Understanding charitable trusts

Charitable trusts are legal arrangements where a trustee holds and manages assets for the benefit of a charitable organization or cause. They are often part of an estate plan. There are two main types of trusts: charitable remainder trusts and charitable lead trusts.

Reducing estate taxes with charitable remainder trusts

In 2021, individual charitable donations reached $319.04 billion, according to the Lily Family School of Philanthropy. Like many of these individuals, you may want to continue your giving after your death. CRTs provide income to your beneficiaries for a specified period, after which the remaining assets get donated to charity. By transferring assets into a CRT, you can receive an immediate charitable tax deduction for the present value of the charity’s remainder interest. This deduction reduces your taxable estate, lowering estate taxes for your heirs.

Leveraging charitable lead trusts for tax savings

CLTs work in the opposite manner of CRTs. They provide income to charitable organizations for a set term, with the remainder passing to non-charitable beneficiaries, such as family members. By donating income to charity upfront, you can reduce the taxable value of the assets passed on to your heirs, ultimately lowering estate taxes.

By supporting charitable causes, you leave a lasting legacy beyond financial wealth, benefiting organizations and communities in need. Assets placed in charitable trusts become shielded from creditors and may provide additional protection from legal challenges.