Charitable Trusts

Charitable Trusts: Giving Back, Reducing Taxes, and Leaving a Lasting Legacy

A charitable trust allows you to support the causes that matter most to you while generating meaningful tax benefits, providing income for yourself or your family, and leaving a philanthropic legacy that reflects your values. For families with significant assets, charitable trusts are among the most versatile and tax-efficient tools in estate planning.

A charitable trust is an irrevocable trust structured to benefit one or more charitable organizations or charitable purposes, either directly or after providing income or other benefits to non-charitable beneficiaries for a defined period. Because assets transferred to a qualifying charitable trust are dedicated to charitable purposes, the law provides significant tax incentives for their creation, including income tax deductions, estate tax reductions, and in many cases capital gains tax savings on the contribution of appreciated assets.

Charitable trusts serve two goals simultaneously. They are giving vehicles that provide meaningful support to the educational institutions, religious organizations, medical research programs, social welfare organizations, and other causes the grantor cares about. And they are planning tools that reduce the grantor's income tax, minimize the taxable estate, and in some cases provide a source of income for the grantor or family members during their lifetimes.

Vermont families with charitable intent and appreciated assets, closely held business interests, or large estates often find that a charitable trust accomplishes multiple planning objectives at once: reducing capital gains tax on an asset sale, generating income, reducing estate tax, and directing a meaningful gift to charity, all within a single legal structure.

A charitable trust is not a sacrifice. It is a strategy. Done well, it allows you to give generously to causes you care about while reducing the taxes your estate would otherwise owe and in many cases generating income you continue to receive during your lifetime.

There are two principal structures for charitable trusts, each designed for a different planning goal and a different relationship between the charitable and non-charitable beneficiaries. Both have dedicated pages on our website with complete explanations, examples, and planning guidance.

Charitable Remainder Trust (CRT)

A Charitable Remainder Trust provides income to the grantor or other designated non-charitable beneficiaries for a specified period, after which the remaining trust assets pass to one or more charitable organizations. The grantor transfers assets into the irrevocable trust, receives an income stream for life or for a term of years, and takes an immediate income tax deduction for the present value of the charitable remainder interest.

A CRT is particularly effective for donors who hold highly appreciated assets, such as real estate, closely held business interests, or a concentrated stock position, that they want to diversify without triggering capital gains tax on the sale. By contributing the asset to a CRT, the trust sells it tax-free, reinvests the full proceeds, and generates an income stream for the donor while directing the remainder to charity.

See our dedicated Charitable Remainder Trust page for a complete explanation, calculation examples, and planning guidance.

Charitable Lead Trust (CLT)

A Charitable Lead Trust is structured in the opposite direction. It provides income to one or more charitable organizations for a specified period, after which the remaining trust assets pass to non-charitable beneficiaries, such as children or grandchildren. The present value of the charitable income stream generates a gift or estate tax deduction, reducing the taxable value of the transfer to family members.

A CLT is particularly effective for families who want to transfer appreciating assets to the next generation at reduced transfer tax cost while also fulfilling charitable goals during the lead period. In low-interest-rate environments, the CLT structure can transfer significantly more wealth to family members than a direct gift or bequest, because the discount rate used to value the charitable lead interest is lower.

See our dedicated Charitable Lead Trust page for a complete explanation, calculation examples, and planning guidance.

Charitable trusts generate tax benefits at multiple levels. The specific benefits available in any situation depend on the type of trust, the nature of the assets contributed, the applicable tax laws, and the grantor's individual tax circumstances.

•      Income tax deduction: The grantor receives an income tax deduction for the present value of the charitable interest at the time the trust is funded. For a CRT, this is the present value of the remainder that will ultimately pass to charity. For a CLT, it is the present value of the income stream that will be paid to charity during the lead period.

•      Capital gains tax savings: Assets contributed to a charitable trust are not subject to capital gains tax at the time of contribution. For a CRT, the trust can sell the contributed asset tax-free and reinvest the full proceeds, generating more income than a taxable sale would have allowed. This makes CRTs particularly valuable for highly appreciated assets.

•      Estate tax reduction: Assets transferred to a charitable trust are removed from the grantor's taxable estate for estate tax purposes, reducing the estate tax liability at death. For Vermont families with estates above the $5,000,000 exemption threshold, this benefit can be substantial.

•      Gift tax reduction for CLTs: A CLT generates a gift tax deduction for the present value of the charitable lead interest, reducing the taxable value of the transfer to family member beneficiaries. In some cases, a properly structured CLT can transfer assets to children and grandchildren with little or no gift tax.

•      Generation-skipping transfer tax planning: Charitable trusts can be coordinated with generation-skipping transfer tax planning to transfer assets to grandchildren and more remote descendants at reduced tax cost.

A qualifying charitable trust must benefit one or more organizations recognized as tax-exempt under Section 501(c)(3) of the Internal Revenue Code or one or more charitable purposes recognized under applicable law. This encompasses a wide range of organizations and causes.

•      Educational institutions, including colleges, universities, private schools, and scholarship programs

•      Religious organizations and houses of worship

•      Medical research institutions, hospitals, and health foundations

•      Social welfare organizations and community foundations

•      Environmental and conservation organizations

•      Arts and cultural institutions

•      Animal welfare organizations

•      Any other organization recognized as tax-exempt under Section 501(c)(3)

The grantor can specify how the charitable organization is to use the trust's assets, such as funding a specific program, endowing a scholarship, or supporting a named initiative, provided the organization agrees to those terms. This level of specificity allows the trust to reflect the grantor's values and priorities in a lasting and concrete way.

Beyond the tax benefits, a charitable trust is a powerful vehicle for expressing and transmitting values. Many families use charitable trusts as an opportunity to involve children and grandchildren in philanthropic decision-making, building an understanding of the family's values and a commitment to giving that extends across generations.

A charitable trust can also be coordinated with a donor-advised fund, a private foundation, or other philanthropic structures to create a comprehensive giving program that reflects the grantor's charitable priorities and provides a meaningful framework for the family's ongoing philanthropy.

At Will and Trust Planning, we work with families to design charitable giving strategies that integrate seamlessly with their estate plans, ensuring that their philanthropic goals are achieved alongside their financial and family planning objectives.

What is the difference between a Charitable Remainder Trust and a Charitable Lead Trust?

In a Charitable Remainder Trust, the grantor or other non-charitable beneficiaries receive income from the trust for a specified period, and the remainder passes to charity at the end of that period. In a Charitable Lead Trust, charity receives income from the trust for a specified period, and the remainder passes to non-charitable beneficiaries, such as family members, at the end of that period. The CRT is income-first for the donor; the CLT is income-first for charity. Both generate tax benefits, but they serve different planning goals and are suited to different family circumstances.

Can I use a charitable trust to avoid capital gains tax?

Yes, particularly through a Charitable Remainder Trust. When you contribute a highly appreciated asset to a CRT, the trust is not subject to capital gains tax on the sale of that asset. The full proceeds can be reinvested to generate income for you, and you receive an income tax deduction for the present value of the charitable remainder. This makes CRTs one of the most effective tools for diversifying a concentrated or appreciated asset position without the immediate tax cost of a direct sale.

Do I have to give the assets to charity immediately?

No. In a Charitable Remainder Trust, the assets remain in the trust and generate income for you or your designated beneficiaries for a specified period before the remainder passes to charity. In a Charitable Lead Trust, charity receives income for a specified period and your family receives the remainder. In both structures, the transfer to charity is deferred; the timing and structure of that transfer is what generates the tax benefits.

Can I choose which charity receives the assets?

Yes. You designate the charitable beneficiary or beneficiaries in the trust document. You can name a specific organization, name multiple organizations in specified proportions, or in some cases give the trustee discretion to allocate among a defined class of qualifying charitable organizations. You can also specify how the charitable organization is to use the funds, such as funding a named scholarship, supporting a specific program, or contributing to an endowment, provided the organization agrees to those conditions.

Does a charitable trust reduce Vermont estate taxes?

Yes. Assets transferred to a qualifying charitable trust are removed from the grantor's taxable estate for both Vermont and federal estate tax purposes. For Vermont families with estates above the $5,000,000 Vermont exemption threshold, charitable trust planning can meaningfully reduce or eliminate Vermont estate tax exposure. The specific benefit depends on the structure of the trust, the value of the assets transferred, and the applicable deductions.

Can I receive income from a charitable trust during my lifetime?

Yes, through a Charitable Remainder Trust. A CRT can be structured to pay you an annuity or a unitrust amount, which is a fixed percentage of the trust's assets revalued annually, for your lifetime or for a term of years up to twenty. The income stream provides financial benefit during your lifetime while the ultimate gift to charity generates an immediate income tax deduction and removes the assets from your taxable estate.

Is a charitable trust right for me?

A charitable trust is most valuable for individuals who have meaningful charitable intent and who hold appreciated assets, have a taxable estate, or want to generate income from assets they intend to give to charity. The most effective charitable trusts are created as part of a comprehensive estate plan, not as standalone instruments. We will assess whether a charitable trust fits your financial situation and philanthropic goals during your Peace of Mind Planning Session.

At Will and Trust Planning, we help Vermont families integrate charitable giving into comprehensive estate plans that accomplish their financial, family, and philanthropic goals together. Before we recommend a single strategy, we sit down with you in a Peace of Mind Planning Session to understand what you own, what causes matter to you, and what you want your legacy to accomplish. We explain your options in plain language and build a plan that reflects your values as much as your assets.

Whether you are exploring a Charitable Remainder Trust to diversify an appreciated position, a Charitable Lead Trust to transfer wealth to your children at reduced tax cost, or a broader philanthropic strategy that integrates a charitable trust with your overall estate plan, we are here to help you make the right decisions with confidence.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.