What is a Split Trust?
by Unbundled Legal Help
A split trust is also called a split-interest trust. It’s a type of trust account that allows you to donate to charity and save on taxes while leaving money for other beneficiaries.
An example is a parent who wants to donate money to a charity and also wants to pass on money (or other assets) to their children. In that case, they can accomplish both goals with a split trust.
There are three types of split-interest trusts. They include charitable remainder trusts, charitable gift annuities, and a charitable lead trust. The kind of trust that works best for you depends on your goals.
If you’re unsure about what type of trust is best for you, let us connect you instantly with with an experienced estate planning attorney in your area.
Learn more about split trusts below.
Types of Split Interest Trusts
The IRS recognizes three types of split-interest trusts: the charitable remainder trust, charitable gift annuity, and charitable lead trust.
The two types of interests that are “split” within this type of trust are an “income interest” and a “remainder interest.” Revenue generated by the property (for a set time) is considered income interest. The “remainder interest” is the value of the trust remaining after the specified time concludes.
Each kind of split-interest trust has advantages and disadvantages depending on your needs. Learn more about each below.
Charitable Remainder Trust (CRT)
A charitable remainder trust is an irrevocable trust that allows you to prioritize non-charitable beneficiaries (including yourself) while still giving funds to charitable beneficiaries. After all payments are made (based on the terms of the trust), the “remainder” goes to charity.
There are two types of charitable remainder trusts. They include charitable remainder annuity trust (CRATs) and charitable remainder UniTrust (CRUTs). A CRAT disperses a fixed amount annually. Also, you can’t add additional funds after the trust is created.
A CRUT disperses a fixed percentage to non-charitable beneficiaries based on the value of the trust. Its value is reassessed annually. You can add additional funds to this type of trust after it is created.
Assets placed in a CRAT or CRUT are irrevocable. In both cases, the trust must disperse a part of the trust’s income or principal to the trust maker or other non-charitable beneficiaries.
Here’s how a charitable remainder trust works:
- Donate money, stock, or other types of assets to a charity. You may receive a partial tax deduction for the donation.
- Depending on how you set up the trust, you or your non-charitable beneficiaries can earn an income every year, semi-annually, monthly, etc. Generally, this amount must be more than 5%, but it can’t be more than 50% of the assets in the trust.
- After the designated time frame of non-charitable distributions expire or the last listed beneficiary dies, the assets remaining in the trust go to the listed charitable beneficiaries.
Charitable Gift Annuity
A charitable gift annuity is a type of charitable gift-giving agreement between the donor and the charity. Individuals who set up a charitable gift annuity are interested in charitable giving, creating a stream of income for life, and tax benefits. Here’s how it works:
- You make a large donation to a charity (as low as $5,000)
- The charity puts the money in a separate account and invests it
- Depending on your age at the time of investment, you receive a fixed payout every month or quarter.
- When you and your spouse die (assuming you contributed as a couple), the charitable organization receives the rest.
Charitable Lead Trust (CLT)
A charitable lead trust is essentially the opposite of a charitable remainder trust. With a charitable lead trust, the designated charities receive financial support for a set number of years. Afterward, the remaining assets go to non-charitable beneficiaries. Here’s how that works:
- You donate assets to fund the charitable lead trust
- The trust maker pays the charity a fixed income through the life of the trust
- When the term expires, the remaining assets go to you or another beneficiary
It’s important to note that there are two types of charitable lead trusts. They include:
- Grantor charitable lead trust: With a grantor CLT, the donor receives an immediate income tax deduction for the current value of the charitable organization’s future distributions.
- Non-grantor charitable lead trust: With a non-grantor CLT, the trust owns the assets in the trust, not the donor. That means that the donor does not receive an income tax deduction. The trust pays the income taxes on the assets in the trust instead.
Individuals establishing a charitable lead trust are typically interested in the income, estate tax savings, charitable giving, and passing assets on to beneficiaries.
Advantages of a Split Trust
A split-interest trust is a form of planned giving that typically involves tax savings for the donor.
In some cases, the primary goal of creating a split-interest trust is to give money to charity in a financially responsible way. In others, donors are more interested in tax savings. Commonly cited benefits of creating a split-interest trust include:
- A split trust allows you to donate large sums to charitable organizations while providing yourself and beneficiaries with tax benefits.
- It produces income over a set amount of time or lifetime, depending on the type of split-interest trust.
- You may avoid paying federal tax on the donated property
- You can potentially spread the tax deduction over five years
- You can choose how you or your beneficiaries receive the income
- You can place different types of assets in a split-interest trust
Many benefits can be attributed to split trusts. However, there are disadvantages as well. Learn more below.
Disadvantages of a Split Trust
While a split-interest trust can offer many advantages, you should be aware of a few drawbacks. They include:
- Once a split trust is established, it is irrevocable. That means that you can’t close the trust or cancel it
- Your heirs will not receive the portion of your property you donate to charity
- Since split-interest trusts have certain tax implications, the fund may be restricted from making some kinds of investments
- In some cases, you may not receive a full tax deduction from your donation
- The cost of setting up a split trust
Understanding a split-interest trust typically requires tax professionals, financial planners, and estate planning lawyers. Contact a split-interest trust attorney to discuss in more detail.
Revocable Trusts That Become Split-Interest Trusts
According to the IRS, a revocable trust does not become a split-interest trust until it’s irrevocable and after a “reasonable period of settlement” so long as:
- The grantor dies, and the trust becomes irrevocable
- The governing instruments of the trust require the trustee to hold a portion or all of the assets “in trust” for charitable and non-charitable beneficiaries after it’s irrevocable
If all of these requirements are met, the revocable trust is considered a split-interest trust. It’s important to note that a reasonable period of settlement is a period that is “reasonably required” for a trustee to carry out normal duties of trust administration such as asset collection, debt payment, distributions, etc.
When is a Split Trust Necessary?
Split-interest trusts are usually not “necessary.” However, they provide a financially savvy option for individuals interested in donating to charity, leaving assets behind for non-charitable beneficiaries, tax deductions, or having a steady source of income.
If you want to leave money behind for a charity but are not sure if a split-interest trust is right for you, contact a will and estate planning lawyer in your area to discuss other options.
Should I Hire an Estate Planning Lawyer?
If you don’t have many assets or expected beneficiaries, you may not need an estate planning lawyer. However, if you are interested in the more complex estate planning tools like a split-interest trust, hiring a lawyer could benefit you in many ways.
Check out a few reasons why hiring an estate planning lawyer might benefit you below.
- An estate planning and trust lawyer can help you navigate complex federal and state estate planning laws.
- An estate planning attorney can ensure that your estate plan is indisputable. They can also make sure that your split-interest trust complies with all tax requirements.
- They can help you to make modifications to your plan.
- A split-interest trust attorney can help you, and your beneficiaries save money.
If you’re still unsure if you should hire an estate planning lawyer, it can help to schedule a free consultation with the best estate planning attorneys in your area to learn if and how they can assist you.
Work With an Unbundled Estate Planning Lawyer Today
Typically, estate planning lawyers can be expensive. That’s true whether you require complex estate planning solutions like a split-interest trust or something more simple like a will. Most estate planning and trust lawyers charge an upfront fee, plus an hourly rate.
With Unbundled Legal Help, you can hire an estate planning attorney to handle the complex parts of your estate plan, while you save money by taking care of the rest on your own.
Fees for unbundled estate planning lawyers start at $500 - $1500. If you require comprehensive estate planning services, our attorneys also offer full representation at affordable rates.
Before you spend thousands of dollars in upfront fees, let us connect you with a local unbundled estate planning and trust lawyer.