Charitable Trusts in Minnesota: Tax Benefits, Trust Types, and Giving Strategies

A charitable trust is an irrevocable trust that benefits both a charitable organization and the grantor’s family while generating meaningful tax advantages. For Minnesota residents whose estates approach or exceed the state’s $3 million estate tax exemption, charitable trusts offer a way to reduce estate and income tax liability, support causes the grantor cares about, and still provide for heirs.

Charitable giving through a trust is fundamentally different from writing a check to a nonprofit. A well-structured charitable trust can convert appreciated assets into income streams, eliminate capital gains tax on the sale of those assets, generate substantial income tax deductions, and remove assets from the grantor’s taxable estate for both federal and Minnesota estate tax purposes.

Charitable Remainder Trusts (CRTs)

A charitable remainder trust is the most widely used charitable trust structure. The grantor transfers assets into an irrevocable trust that pays income to the grantor (or other named beneficiaries) for a specified period, after which the remaining trust assets pass to one or more charities.

CRTs come in two forms:

Charitable Remainder Annuity Trust (CRAT)

A CRAT pays a fixed dollar amount each year, determined at the time the trust is created. The payment does not change regardless of the trust’s investment performance. This structure provides predictable income but offers no inflation protection.

• The annual payout must be at least 5% and no more than 50% of the initial fair market value of the trust assets
• No additional contributions are permitted after the trust is funded
• The present value of the charitable remainder must equal at least 10% of the initial contribution (IRC Section 664)

Charitable Remainder Unitrust (CRUT)

A CRUT pays a fixed percentage of the trust’s value, recalculated annually. If the trust’s investments grow, the payments increase; if the value declines, payments decrease.

• The annual payout must be at least 5% and no more than 50% of the trust’s net fair market value
• Additional contributions are permitted
• The same 10% remainder requirement applies

CRUTs are generally more popular than CRATs because they allow additional contributions and provide a hedge against inflation through the variable payment structure.

Tax Benefits of a CRT

The tax advantages of a charitable remainder trust are substantial:

• Income tax deduction. The grantor receives a charitable income tax deduction in the year the trust is funded, based on the present value of the charitable remainder interest. The deduction is calculated using IRS tables, the payout rate, the trust term, and the applicable federal rate.
• Capital gains avoidance. When the grantor contributes appreciated assets (such as stock or real estate) to the CRT, the trust can sell those assets without triggering immediate capital gains tax. This allows the full value of the assets to be reinvested and generate income.
• Estate tax reduction. Assets transferred to a CRT are removed from the grantor’s taxable estate. For Minnesota residents, this can mean significant savings given the state’s 13% to 16% estate tax rates.

Practical Example

A Minnesota business owner holds $1 million in highly appreciated stock with a cost basis of $100,000. Selling the stock outright would trigger approximately $180,000 in combined federal and state capital gains tax, leaving roughly $820,000 to reinvest.

By contributing the stock to a CRUT with a 5% annual payout, the business owner avoids the $180,000 capital gains tax entirely, receives income of approximately $50,000 per year (adjusted annually based on trust value), claims a charitable income tax deduction for the present value of the remainder interest, and removes the $1 million from their Minnesota taxable estate.

Charitable Lead Trusts (CLTs)

A charitable lead trust reverses the CRT structure. The charity receives income from the trust for a specified period, and the remaining assets then pass to the grantor’s family members, often at significantly reduced gift and estate tax values.

CLTs are particularly effective when interest rates are low, because the IRS formula used to value the remainder interest (based on IRC Section 7520 rates) produces a lower taxable gift when rates are low. The difference between the actual trust growth and the IRS assumed rate passes to family members free of gift and estate tax.

Grantor vs. Non-Grantor CLTs

• Grantor CLT. The grantor receives an income tax deduction when the trust is created but must report trust income on their personal tax return each year. This structure works best for grantors with a single year of unusually high income who want an immediate large deduction.
• Non-grantor CLT. The trust itself claims the charitable deduction, and the grantor does not report trust income. This structure is more common and is primarily used as an estate and gift tax reduction tool rather than an income tax strategy.

Minnesota-Specific Considerations

Minnesota’s estate tax regime makes charitable trust planning particularly valuable for several reasons:

• Lower exemption threshold. Minnesota’s $3 million estate tax exemption is far below the federal exemption, meaning more families face state estate tax liability. Charitable trusts reduce the taxable estate directly.
• No portability. Unlike the federal estate tax, Minnesota does not allow a surviving spouse to use a deceased spouse’s unused exemption. Married couples must plan independently, and charitable trusts can serve as an effective component of each spouse’s plan.
• State income tax deduction. Minnesota generally conforms to federal charitable deduction rules, meaning the income tax deduction from a CRT contribution reduces both federal and state income tax liability.
• Minnesota Trust Code. Charitable trusts created under Minnesota law are governed by the Minnesota Trust Code (Minn. Stat. Chapter 501C), which includes provisions for trust administration, trustee duties, and modification. The attorney general’s office has oversight authority over charitable trusts to ensure the charitable purpose is fulfilled.

Donor-Advised Funds as an Alternative

For individuals who want the tax benefits of charitable giving without the complexity and cost of establishing a charitable trust, a donor-advised fund (DAF) offers a simpler alternative.

A DAF is an account established at a sponsoring organization (such as a community foundation or financial institution). The donor makes an irrevocable contribution, receives an immediate income tax deduction, and then recommends grants to qualified charities over time. The sponsoring organization handles all administrative, investment, and reporting requirements.

DAFs are advantageous because they require no legal fees or trust administration costs, they allow contributions of cash, securities, and other assets, the donor receives an immediate deduction even if grants are distributed over many years, and they provide flexibility to support multiple charities without establishing separate vehicles for each.

However, DAFs do not provide the income stream that a CRT generates, and they do not offer the estate and gift tax planning capabilities of a CLT. For high-net-worth individuals, a DAF may complement rather than replace a charitable trust strategy.

Private Foundations vs. Supporting Organizations

Families seeking a more structured philanthropic vehicle may consider establishing a private foundation or a supporting organization.

Private Foundations

A private foundation is an independent charitable entity, typically funded by a single family or corporation. It offers maximum control over investment decisions, grant-making, and governance. However, private foundations face stricter regulatory requirements, including a mandatory 5% annual distribution requirement, excise taxes on net investment income, restrictions on self-dealing between the foundation and its substantial contributors, and public disclosure of all financial information through annual Form 990-PF filings.

Supporting Organizations

A supporting organization is a public charity that operates in connection with one or more existing public charities. It avoids many of the regulatory burdens applicable to private foundations while still allowing the family significant input into grant-making decisions. Supporting organizations are classified under IRC Section 509(a)(3) and must meet specific organizational and operational tests.

Choosing the Right Charitable Vehicle

The choice among charitable trusts, donor-advised funds, private foundations, and supporting organizations depends on several factors:

• Income needs. If the grantor needs ongoing income from the donated assets, a CRT is the appropriate vehicle.
• Wealth transfer goals. If the primary objective is passing assets to heirs at reduced transfer tax cost, a CLT is most effective.
• Simplicity and cost. For straightforward charitable giving with immediate tax benefits, a DAF provides the lowest administrative burden.
• Control and legacy. For families seeking a permanent philanthropic institution with family governance, a private foundation or supporting organization may be worth the additional complexity.

Working with an Attorney

Charitable trust planning sits at the intersection of tax law, trust law, and nonprofit law. The choice of structure, the payout rate, the trust term, and the selection of charitable beneficiaries all have significant tax and legal consequences. An experienced estate planning attorney can evaluate whether a charitable trust fits within the client’s broader estate plan, model the income tax and estate tax implications of different structures, draft the trust document to comply with IRS requirements for tax-exempt status, and coordinate the charitable trust with other planning tools such as irrevocable life insurance trusts and business succession plans.