This article looks at how private foundations can be used to widen family control over charitable remainder or charitable lead trusts.

Jeffrey Haskell, chief legal officer at Foundation Source, explains why charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) have one inherent drawback: They cannot carry out a family’s charitable intentions beyond their relatively short terms.

However, when a private foundation is used alongside either a CRT or CLT, families can receive all the benefits of these vehicles while retaining perpetual control over the charitable funds —potentially forever.

Many families have either a charitable remainder trust (CRT) or a charitable lead trust (CLT), which offer signi?cant advantages for the family by providing tax savings and distributions back to the family while benefiting charities.

CLTs are primarily used to make charitable contributions while also creating the opportunity for tax-free gifts to family. In a CLT, the donor contributes assets to a trust that makes annual distributions to 501(c)(3) non-pro?t organizations for a stated number of years. After this period of time, any remaining assets in the trust pass to the donor’s family free of gift tax.

In a CRT, the charitable and family interests are reversed: The donor contributes assets to a trust that makes annual distributions to the donor (or other individuals) for a stated number of years (or for the private bene?ciary’s life). After this period, any assets remaining in the trust pass to one or more charities. CRTs are primarily used to provide the donor with lifetime cash ?ow while obtaining a current charitable deduction from income tax.

The downside of CLTs and CRTs is that they have a limited lifespan. Although their trust instruments can be, and often are, drafted to allow the donor or the donor’s family to control which charities will ultimately receive a charitable distribution from the trusts, that control is ?nite. In the case of a CLT, the control is limited to the term of the trust, which is usually 30 years or less. With a CRT, control is enjoyed only during the lifetime of the donor (or other private bene?ciary).

Family control over CLT or CRT funds for charity does not have to end, however, if a CLT or CRT is combined with a private foundation. The trust instruments may be drafted to permit or require charitable distributions to the donor’s private foundation so that the donor or the family can continue to control the charitable use of those funds for years to come. A CLT or a CRT can be used to fund a private foundation immediately, even if the term of the trust will not end for many years—there's no need to wait.

These following techniques can apply to both existing and newly-created CLTs and CRTs. In some cases, even if an existing trust does not appear to permit distributions to a private foundation, it may be possible to modify the trust so that it does.

Example: CLT

Upon his death ?ve years ago, Chris donated $1,000,000 to a CLT with a 20-year term. The trustees of the CLT (who are Chris’s children) must pay out $50,000 each year to charities that they select. This means that over the next 15 years, the remainder of the CLT’s term, they will pay out a total of $750,000. At the end of the term, any remaining assets in the CLT will pass to the children. As each annual distribution is made, however, $50,000 of charitable dollars passes from the control of the family. The family would like to retain control over those charitable funds.

Solution: Instead of the CLT making distributions to unrelated public charities, the children can establish a private foundation now and have it make the distributions to their foundation. By the end of the CLT term, not only will the children enjoy the remainder of whatever is left in the CLT, but they will also have a private foundation funded with at least $750,000 that they and their descendants can use to further their charitable giving objectives in perpetuity.

Example: CRT

Ten years ago, Pat created a CRT, which will make payments to her for life and then pass to one or more charities to be named by her. It is projected that the remainder value of the CRT at the time of Pat’s death will be approximately $750,000. If Pat does name those unrelated public charities as the remainder bene?ciaries, those charities will receive $750,000 (or the actual remaining funds in the CRT) at her death, and her family will lose control over how those funds are distributed. After giving the matter some thought, she decided she would prefer to have her family control those funds after her death or perhaps to have that control start immediately.

Solution 1: Pat can create a private foundation and name the foundation as the charitable remainder bene?ciary of her CRT. The foundation will be funded with the remaining assets of her CRT at the time of her death, approximately $750,000. Pat’s family can control those charitable assets in the foundation forever.

Solution 2: Pat can create a private foundation, name the foundation as the charitable remainder bene?ciary of her CRT, and then donate the balance of her lifetime interest to the foundation. This will “merge” the life and remainder interests, resulting in immediate termination of the CRT. The $750,000 of assets now in the CRT will immediately pass to her foundation where those assets can be used to support the family’s charitable objectives for many generations (and Pat will be able to claim an income tax deduction for the value of her donated life interest).