Giving Faceoff: Charitable Remainder Trust (CRT) versus Donor Advised Fund (DAF)

lucidityI’ve written extensively about how I use a donor advised fund to give more generously while taking advantage of the ability to reduce your taxable income while working and living in a high tax bracket.

Another vehicle that can accomplish the same thing in a different way is the charitable remainder trust (CRT). I knew a little about them but hadn’t explored the concept in much detail.

I’ve been accused of being greedy because I park my donated dollars in the donor advised fund before dishing it out; I can’t imagine what the naysayers would say if I were using a CRT instead!

The creator of IQ calculators offered to compare and contrast the two, and he shows one way in which the two can be used together to negate one of the downsides of the CRT.

Read on to learn more about two of the more popular charitable giving vehicles as explained by my friend over at IQ Calculators.

 


 

Giving Faceoff: Charitable Remainder Trust (CRT) versus Donor Advised Fund (DAF)

 

We have spoken at length about tax-efficient ways to give money to charitable causes. Charitable giving is one of those things that many physicians are privileged to be able to do and also reap the tax incentives for doing so. In this article, we will talk about two strategies for accomplishing tax-advantaged charitable giving.

Those two are donor advised funds and charitable remainder trusts. Both provide tax strategies for giving to charity, but they both present their own unique advantages and disadvantages. Because of this, some people even choose to combine the two strategies in order to receive the benefits of both. We will try to explain the advantages and disadvantages and why it could make sense to combine the two into one strategy.

 

Charitable Remainder Trust Overview

 

A charitable remainder trust is a trust where money is placed for a certain period of time or until the donor’s death at which point the money is transferred to the charity spelled out in the trust documents at the time the trust was formed.

During the period of time between when the trust was formed and the trust is given to the charity, the charitable trust will make payments or distributions to the donor. This is a high-level overview of how a CRT works but some of the finer details will be spelled out in the advantages and disadvantages below.

 

Charitable Remainder Trust Advantages

 

1. Upfront Tax Deduction

 

One of the advantages of giving to a qualified charity in any circumstance is the tax deduction, and that’s no different with a CRT. The calculation to determine the tax deduction is not as simple as a normal tax deduction, but there is a tax deduction given nonetheless.

The size of the tax deduction depends on the amount of money given, the length of the trust, and the amount of money that is elected to be withdrawn each year. For a charitable remainder trust calculator, see this one from IQ Calculators.

 

2. Periodic Payouts to the Donor

 

During the period of time between when the trust is set up and until the trust funds are given to the charity, the trust pays a set amount of money to the donor periodically. The amount of the withdrawal/payout is chosen at the beginning of the trust by the donor and as previously mentioned, will affect the tax deduction.

The higher the payout, the lower the tax deduction, and vice versa. To calculate your CRT payment, explore using this tool. The CRT also will allow potential growth in the payouts to the donor if the value of the assets inside the trust grow.

 

3. Avoidance of Capital Gains Tax

 

CMGAssets themselves can be donated to a CRT. Once assets are inside the trust, they can be liquidated and any capital gains tax that would normally be owed would be deferred to the point in time that the assets came out of the trust in payment to the donor.

Details on how payments to the donor are taxed can be complicated, but for simplicity sake, just know that much, if not all capital gains taxes could be avoided when donating to a CRT.

 

4. Reduction of the Donor’s Estate

 

When gifting to a CRT, the assets in the trust are no longer included in the donor’s estate and would be excluded if/when that day came to calculate estate taxes.

 

Charitable Remainder Trust Disadvantages

 

1. Choosing The Charity Years In Advance

 

The donor has to choose the charity where they want the funds to go when the trust is formed and this cannot be changed later. It can be difficult to choose the charity when the funds won’t be going there until some point in the distant future. A lot can change about the charity and the donor’s preferences during those years.

 

2. Loss of Control Of Assets

 

The moment that the trust funds are given to the charity or beneficiary of the trust and the trust expires, the donor no longer has control of the funds. Up until that point, they would still remain in control of directing how the assets are invested, but afterward, they cease to exercise any control. The charity is in control of the funds at that point.

 

Donor Advised Funds Overview

 

A donor advised fund is a fund that acts as a charity and receives donations from donors. The donor advised fund holds the invested money until the donor decides which charity the fund should be gifted to.

When the funds are given to the DAF, the donor receives a tax deduction for their charitable donation.

 

Donor Advised Fund Advantages

 

A donor advised fund has all the same advantages that a CRT has.

  • Tax Deduction
  • Capital Gains Avoidance
  • Reduction of Donor’s Estate

However, a DAF does allow the donor to choose the charity at a later date and not when the funds are immediately gifted to the charity like a CRT requires.

 

nph honduras — a monthly recipient of pof’s daf

 

Donor Advised Funds Disadvantage

 

  • No income for the donor while waiting for the charitable recipient to be named.

The main disadvantage that a DAF has relative to a CRT, is that the funds cannot generate income for the donor while the donor is alive, a feature that a CRT allows.

 

Does Combining a DAF with a CRT work?

 

Combining a DAF with a CRT can provide the benefits that both strategies offer. This provides additional flexibility and lets the donor give on their own terms.

DDQ
The way this can work is by naming the DAF as the CRT beneficiary. By doing this, the pressure involved with naming the charity immediately is removed because when the funds are given to the DAF, then the charity can be chosen.

And when the CRT is passed on to the DAF, the donor can name a charitable cause then, or he can let their family that they leave behind continue their charitable legacy by letting them manage where the DAF funds will be given.

This will also allow the individual or their financial advisor to continue managing the charitable donation funds while it’s still in the CRT. Furthermore, if the donor would like to contribute to the DAF while they are alive, they can use the CRT distributions to contribute to the DAF and receive another tax deduction in addition to the one received for gifting to the charitable trust.

 

Conclusion

 

A donor advised fund and a charitable remainder trust are both very similar in their nature, and the things that they can accomplish for the charitably inclined. Each of them have a small advantage over the other one (as mentioned above) that when combined, gives the donor the benefits of both of these charitable tools.

So next time you think about giving, be sure to check out the benefits of combining these two vehicles by consulting your legal counsel and/or financial advisor before choosing your charitable giving strategy.

 

[PoF: Thank you for taking a break from IQ Calculators to highlight two intelligent ways to donate money to charities in a tax-advantaged way. As I’ve argued many times before, doing so is not selfish — in fact, the tax deduction allows you to put more money in the charity’s coffers per dollar you part with.

I hadn’t considered a CRT before, but it may be something I consider later in life when I might be looking for a way to create some fixed income — an annuity with a charitable mission, essentially. And I love the idea of pairing it with our already established DAF]

 

For more information on donor advised funds, see my additional posts on the topic:

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Track your investments for free with Personal Capital. That's how I track the PoF portfolio.  

 

Have you established either a Donor Advised Fund or a Charitable Remainder Trust? Are either of them (or a combination of both) a strategy you’ll consider for charitable giving in the future? 

 

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6 comments

  • Zac

    I love that giving is such a large part of your own financial plan and I aspire to have my own massive DAF at some point. For some reason I’ve never been too stingy with giving (humble brag) but I want to use that virtue in the most financially sound way possible, so thank you for an informative post!

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  • RGS

    Depending on how the CRT is set up, the charitable beneficiary can be changed. I set one up and the expense of ongoing management, tax filing, etc. was taken on by a beneficiary, but the document required that 51% was an irrevocable grant to that charity, and the remaining 49% can be changed by me at a later date.

  • I have been looking into a DAF, but have never heard of a CRT. Thanks for giving a brief overview of both.

    It’s always somehow seemed wrong to let tax consequences define my charitable giving, but I’ve kind of settled on the idea that the more of my income I can shelter from taxes, the more money can actually go to the charity in the long run.

  • Good overview. I have been looking at both of these for a while. I understand it from an estate planning standpoint, and I will likely set something like this up to help with that. I have plenty of charities I want to give to right now, though, so it’s difficult for me to justify giving to a DAF or CRT when I’m ready to donate money now. No sense in waiting when the causes I care about need money now! Thanks again for the good overview.

    • artemis

      How many charities do you donate to, and how often? One under-appreciated advantage of a DAF is that it greatly simplifies your paperwork at tax time. Whether you distribute the funds to one charity or a hundred, whether you make one donation a year or donate every week or month, you need to keep track of only one receipt: the one the DAF gave you for the initial donation to the DAF. That’s not a big advantage if you make larger donations to a handful of charities, but it’s a huge help if you like to make smaller or more frequent donations to many different ones (as I do).

      And there’s no requirement that money in a DAF needs to sit around for years before being dispersed. Right now I’m using mine as a pass-through account: funds given to the DAF this year will be dispersed this year. I’m using the DAF simply to reduce paperwork headaches. But everyone’s different; from the donor’s standpoint, the flexibility of a DAF is a real benefit (especially given the recent changes in tax law which make it tough for many to itemize unless they clump several years’ worth of donations together).

    • As Artemis says, using a DAF does simplify giving now, and it makes even more sense to use one to “bunch” the tax-deductible part of giving on occasional years so that you’re well above the $24k standard deduction by donating a large amount to a DAF and doling it out over several years or more.

      Cheers!
      -PoF

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