I. Introduction: The Split-Interest Strategy
The IRS allows for a sophisticated form of giving called Split-Interest Gifts. This is where an asset is placed in a trust, and the "benefits" (income and principal) are split between a charity and a private individual (you or your heirs).
The two primary engines for this are the Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLT). They are mirror images of each other, used for opposite economic goals.
II. The Charitable Remainder Trust (CRT): "Income for Me, Remainder for Them"
A CRT is the ultimate "Retirement and Diversification" tool for a founder with a highly appreciated asset.
1. How it Works
Transfer: You move a $10M asset (with a $0 basis) into the CRT.
Tax-Free Sale: The CRT is a tax-exempt entity. It sells the asset for $10M and pays $0 in capital gains tax.
Income Stream: The trust pays you (the donor) an income for life or a term of up to 20 years.
The Remainder: When you die, whatever is left in the trust goes to your charity (or DAF).
2. The Two Types: CRAT vs. CRUT
CRAT (Annuity Trust): Pays a fixed dollar amount every year. Best if you want total certainty and are pessimistic about the market.
CRUT (Unitrust): Pays a fixed percentage of the trust’s value, recalculated annually. If the trust grows, your check grows. This is the preferred tool for a "Fortress" because it acts as a hedge against inflation.
3. The "Math" Benefit
You receive an immediate income tax deduction for the "present value" of what the charity is expected to receive in the future.
IMPORTANT
Rule of Thumb: At least 10% of the initial value must be projected to go to the charity for the IRS to approve the trust.
III. The Charitable Lead Trust (CLT): "Income for Them, Remainder for My Heirs"
If the CRT is a retirement tool, the CLT is a Wealth Transfer tool. It is the "Inverse Mirror."
1. How it Works
Lead Interest: The charity gets the "Lead" (the income) for a set number of years.
Remainder Interest: After the term ends, the remaining assets go to your children or grandchildren.
2. The "Zero-Out" Strategy (The CLAT)
This is the "Holy Grail" of estate planning. By setting the annual payment to the charity high enough, the IRS calculates that the "present value" of the gift to your heirs is zero.
The Reality: If the assets in the trust grow faster than the IRS’s assumed interest rate (Section 7520 Rate), that "excess growth" passes to your children completely free of gift and estate taxes.
IV. The 7520 Rate: The "Hurdle"
The success of these trusts depends on the Section 7520 Rate (the interest rate set by the IRS monthly).
Low Interest Rates: Best for CLTs. It’s easier for your investments to "beat" the IRS hurdle, leaving more for your heirs.
High Interest Rates: Best for CRTs. It increases the "Value" of the gift to charity in the IRS’s eyes, giving you a bigger upfront tax deduction.
V. Beyond Trusts: Advanced Giving Techniques
1. The "Bunching" Strategy
Since the 2017/2026 tax changes increased the standard deduction, many families don't get a tax benefit for annual $10k donations.
The Play: "Bunch" 5 years of giving ($50k) into a single year by contributing to a DAF. You itemize in Year 1 for a massive deduction and take the standard deduction in Years 2–5.
2. Qualified Charitable Distributions (QCDs)
If you are over 70½, you can send up to $105,000 (indexed for inflation) directly from your IRA to a charity.
The Benefit: This money never hits your tax return. It’s better than a deduction because it lowers your Adjusted Gross Income (AGI), which can reduce the "stealth taxes" on your Social Security or Medicare premiums.
3. Donating "Complex Assets"
Don't give cash. Give Private Equity, Restricted Stock, or Real Estate.
By donating these before a "Liquidity Event" (like an IPO or an acquisition), you wipe out the capital gains tax and get a deduction for the Fair Market Value.
VI. The Comparison Table
Feature | CRT (Remainder) | CLT (Lead) |
Primary Goal | Income & Diversification | Gift & Estate Tax Savings |
Who gets paid first? | You (The Donor) | The Charity |
Who gets the leftover? | The Charity | Your Heirs |
Best Asset to Fund | Highly Appreciated Stock | High-Growth Assets |
Ideal Rate Climate | High 7520 Rates | Low 7520 Rates |
VII. Checklist: The Philanthropic Architect
Run the Actuarial Math: Have your CPA run a "CRUT vs. CLAT" simulation based on the current month's 7520 rate.
Check the 10% Rule: For CRTs, ensure your payout isn't so high that it fails the "Remainder Requirement."
Identify the "Zero-Out" Opportunity: If you have an asset you expect to grow at 10%+, a CLAT can move that wealth to your kids for $0 in gift tax.
Document the Appraisal: For real estate or private business interests, you must have a formal "Qualified Appraisal" to claim the deduction.
Conclusion
Advanced charitable giving is where the "Fortress" meets "Contribution." By using the legal "math" of the IRS, you can support the causes you love while simultaneously protecting your heirs from the 40% estate tax.
Internal Encyclopedia Links:
See: Section 7520 Rates: The Hurdle of the Fortress
See: DAF vs. Private Foundations: Choosing the Bucket
See: Estate Taxes: How Split-Interest Trusts Beat the Sunset
Related to: The Ultimate Guide Part 3 (The Fortress) & Part 5 (The Philosophy of Enough)
