A charitable trust—also known as a public trust—is a trust created for the benefit of a specific charity or charities. Charitable trusts often provide favorable tax treatment to the person funding the trust—known as the grantor, settlor, or donor.
There are two types of charitable trusts: charitable lead trusts (CLT) and charitable remainder trusts (CRT). A charitable lead trust is an irrevocable trust made in favor of a charity that allows the charity to receive income from the trust’s assets for a specified period, and when that period expires the property returns or reverts to the settlor’s estate.
A charitable remainder trust is a trust that includes or is funded with assets designated for a charitable purpose that are donated to the trust after the expiration of the grantor or settlor’s life estate or intermediate estate in the assets (the right to use the assets for the lifetime of the person who made the trust, or for some specified period).
A grantor, settlor, or donor may fund a charitable remainder trust with assets that have appreciated in value over time—and because the grantor is ultimately donating the assets to the charity the grantor does not incur capital gains taxes on the appreciated assets, may take a charitable income tax deduction, and may reduce estate taxes—while continuing to receive income or enjoy the use of the donated trust assets during the grantor’s lifetime or other specified period.
A charitable trust described in Internal Revenue Code section 4947(a)(1) is a trust that is not tax exempt; in which all the unexpired interests are devoted to one or more charitable purposes; and for which a charitable contribution deduction was allowed under a specific section of the Internal Revenue Code. A charitable trust is treated as a private foundation unless it meets the requirements for one of the exclusions that classifies it as a public charity.
Thus, a charitable trust is subject to the private foundation excise tax provisions and the other provisions that apply to exempt private foundations, including termination requirements and governing instrument requirements. But a charitable trust is not treated as a charitable organization for purposes of exemption from tax—and the trust is subject to the excise tax on its investment income under the rules that apply to taxable foundations rather than those that apply to tax-exempt foundations.
In Texas, a charitable trust is established for the benefit of one or more charities, providing potential tax advantages to the donor. There are two main types: Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs). A CLT allows a charity to receive income from the trust for a set period, after which the assets may revert to the donor's estate. A CRT provides income to the donor or other beneficiaries for life or a specified term, with the remainder interest going to charity, offering tax benefits such as avoidance of capital gains tax on appreciated assets, income tax deductions, and potential estate tax reductions. Under Internal Revenue Code section 4947(a)(1), a charitable trust that is not tax-exempt and allows for a charitable deduction is treated as a private foundation, subject to excise tax provisions and other regulations applicable to private foundations, unless it qualifies as a public charity. These trusts are not exempt from tax on investment income and are taxed similarly to taxable foundations.
