In this article we explain charitable trusts and answer frequently asked questions. We discuss:
Charitable trusts are a great way to fulfill philanthropic objectives by allowing individuals to donate to an organization and receive tax benefits, while also generating income for specified beneficiaries. In this article, we’ll review the basics of charitable trusts.
According to the Internal Revenue Service, a charitable trust is an irrevocable trust that is established for charitable purposes by an individual who contributes assets or property to one or more non-charitable beneficiaries for life or a predetermined number of years. A charitable trust allows you to leave some or all of your estate to a 501(c)(3) organization of your choice. You can leave money, stocks, real estate, and other valuable assets, like cars and paintings. Charitable trusts require an individual to give up legal control of your property, and they are irrevocable – once the trust becomes operational, you cannot change your mind to regain legal control of the trust property.
Charitable organizations include not-for-profit schools, hospitals, churches, and public charities. Private charitable foundations may also qualify under certain circumstances.
Majority of grantors prefer to name an independent, professional trustee. Professional trustees are preferred, because they can often handle many of the complex issues surrounding charitable trusts. The donor can be a trustee, but clarification in the trust’s documentation must be clear so the donor does not lose the benefits.
Non-charitable beneficiaries have to be living when the trust is originally established. These individuals are typically the grantor or the grantor’s spouse or children.
There are a variety of reasons to establish a charitable trust, including:
The best assets to donate are appreciated assets with low returns held for more than 12 months, because the income tax deduction is based on the higher fair market value rather than the initial cost.
To create a charitable trust, you should work with an estate planning attorney and a financial advisor. Before creating a charitable trust, make sure you speak with the organization to which you are donating in order to include its preferences on how and where to donate.
There are three main steps to creating a charitable trust:
1.) Decide which assets you want to add to the trust. Donations are irrevocable, so be sure to exercise caution and be confident in your decisions.
2.) Identify your beneficiaries. Clarify whether you want the trust income to pay your beneficiaries or the organization first. Consider the value of your tax deduction when determining payments.
3.) Partner with a professional to create the trust document. This is when you will actually transfer your assets to the trust.
The are two primary types of charitable trusts: Charitable Lead Trusts and Charitable Remainder Trusts. Charitable Lead Trusts pay the charity a fixed amount and pay the remainder to the other beneficiaries. Charitable Remainder Trust do the opposite, paying the other beneficiaries a fixed amount and paying the remainder to the charity.
For more, check out our article: What Are the Different Types of Charitable Trusts?
To learn about management of an existing charitable trust, check out our article: How to Manage a Charitable Trust.