Charitable Giving in Trusts
Charitable trusts enable you to give to your favorite charity while still producing a deluge of income from the assets that were donated.
Trusts can be a powerful way to carry out charitable gift-giving. Whereas there are some downsides to establish a charitable giving trust, these trusts also offer a lot of benefits, making them an invaluable estate planning device for many people interested.
The way a charitable trust works
Through a charitable trust, there is a donor or grantor—the individual that devised the trust and then funded the trust by transferring assets into it. A charitable organization, typically a 501(c)(3) or an organization that is tax-exempt, is one of the appointed beneficiaries. Additional beneficiaries usually include the donor and/or the family members of the donor.
The donor additionally names a trustee that is going to oversee the assets in the trust. The income and capital from the trust are then allocated in accordance with the conditions of the trust. When non-income-creating assets are placed into the trust, the trustee typically sells the assets and invests the return of the sales into income-creating property.
Kinds of charitable trusts
There are two main kinds of charitable trusts:
- Charitable lead trusts. In this trust, the income created by the trust is allocated to the appointed charity for a specific number of years, after the time the assets leftover in the trust are allocated to the other appointed beneficiaries.
- Charitable remainder trusts. In this trust, it is just the opposite. The income created by the trust is allocated to the beneficiaries in the non-charity, and at the conclusion of the trust, the remnants are provided to the appointed charity.
When people speak about a charitable giving trust, they might be contemplating about a charitable remainder trust. This type of trust is more useful to more affluent individuals that want to give to their chosen charity and that don’t have a need for the income created by the trust.
The below are two kinds of charitable remainder trusts:
- Charitable remainder annuity trust. This trust provides the beneficiaries with a fixed annuity every year until the trust is completed. This kind of trust works best for people that want to know exactly how much they are going to get from the trust annually.
- Charitable remainder unit trust. Using this kind of trust, the beneficiaries receive a fixed percentage of the worth of the trusts annually. This trust is appropriate should you have concerns regarding the risk of inflation on the income you are going to receive annually from the trust.
Charitable trust benefits
These trusts provide donors with numerous benefits, including the below:
- Charitable tax deduction. Since the intention of a charitable trust is to give donations to the stated charity, you are going to be qualified for a charitable deduction on your income tax. Nevertheless, with a charitable remainder trust, the amount of the donation is not going to be the worth of the assets passed into the trust. The amount subject to several factors, including the entire amount of income you anticipate receiving throughout the life of the trust.
- Capital gains tax. Because a charitable trust is an irrevocable one, after an asset has been placed into the trust, the trust now owns it. Since the trust is a charitable one, should the trust sell the asset, the revenue of the sale does not induce capital gains tax. Making a charitable trust an ideal means for assets that have appreciated in worth.
- Estate tax. Because of the irrevocable type of charitable trusts, any assets retained by the trust do not count as a portion of the donor’s estate for the purpose of estate taxes following the donor’s passing. A lot of individuals have no need to decrease estate tax, as only high-valued estates are subject to this type of tax, but for more wealthy people, charitable trusts can be a useful way of decreasing estate tax for their beneficiaries.
Charitable trust disadvantages
There are, on the other hand, some disadvantages to this type of trust, including the below:
- Inadaptability. To be legitimate, a charitable trust is required to be irrevocable. Meaning you can’t rescind the trust, make any alterations to the conditions of the trust (with some restricted exemptions), or take assets out of the trust.
- Control loss. The irrevocable way of the trust in addition means you lose control over the assets you’ve placed into the trust. The trustee has sole management over how the trust assets are overseen, and their obligation is to the trust, and not to the donor, you.
- Costs. Whereas some trusts can be somewhat easy to carry out with a DIY method, the same can’t be said for trusts that are charitable. Fouling up the conditions of a charitable trust can have a catastrophic financial impact, so it’s typically wise to retain the services of a knowledgeable attorney to assist you in establishing the trust.
Creating a charitable trust
Like any other trust means, beginning a charitable trust involves establishing the trust documentation, putting funds in the trust, naming beneficiaries, including an appointed charity, and naming a trustee. When devising a charitable trust, the below are some important points:
- The period of the trust. You can have the trust established for a fixed period of time (up to twenty years) or for the lifetime of a particular beneficiary.
- Remainder or lead trust. You are required to decide whether you want your beneficiaries to receive a deluge of income from the trust, or if you want your appointed charity to get the trust’s annual income, with any assets remaining in the trust transferring to your beneficiaries.
- Fixed distribution or percentage of worth. When establishing a charitable remainder trust, you also must decide if you want an annuity trust, in which is going to distribute a set amount annually, or a uni-trust, in which is going to distribute a percentage of the value of the trust each year.
The irrevocable way of the charitable trust means you can’t change your mind about most of the conditions of the trust after it’s been devised, so it’s vital to take time to think about and assess the way you want your charitable trust to be established.
These trusts can be a perfect option in an estate plan when charitable giving is significant to you, but you still wish for your beneficiaries to benefit from the assets donated, either through a constant income deluge or when the trust concludes.
Belle Wong, J. D. (2022, November 16). Charitable giving in Trusts. LegalZoom. Retrieved February 24, 2023, from https://www.legalzoom.com/articles/charitable-giving-in-trusts
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