Charitable Trusts

Charitable Trusts 101

There are two primary types of charitable trusts: charitable lead trusts and charitable remainder trusts. These trust types mirror each other but serve different needs. Notwithstanding, one thing they have in common is that the chosen charity or charities must qualify with the Internal Revenue Service (IRS) to receive charitable deductions according to the type of trust and terms you select.

Charitable lead trust: This trust type first distributes a portion of its proceeds to a charity, for which you’ll receive a charitable donation tax deduction equal to those payments. The remainder of the principal is then distributed to your beneficiaries.

Charitable remainder trust: With this trust type, you choose to receive an income from distributing the non-income-producing assets you placed into the trust first. You’ll also receive a charitable donation tax deduction based on the present value of the remainder of the assets earmarked for the charity. At the end of the term or upon your death, your chosen charity receives the rest of the assets.

Typically, once you move your assets into a charitable trust, it sells the assets and distributes them according to the trust type and the terms you select. Once created, a trust is irrevocable — even if you suffered a personal or business financial loss. These trusts have many moving parts, and it can help to speak with a financial representative to learn more about how a trust could fit into your financial plan.

Benefits of Giving

When you give to charity, you can impact the world around you – and a charitable trust could help you continue to give long after you are gone. It’s also one way to put your plans for giving to exemplary work.

Setting up a charitable trust can have many tax incentives and financial benefits for those who want to set aside high-value assets they don’t need to support themselves in retirement. By moving these assets into a charitable trust, you can avoid paying capital gains on real estate or stocks when they’re sold at a higher present value.

Both types of trusts effectively reduce your estate through charitable donation, which helps minimize estate taxes. They also eliminate probate for your beneficiaries. At the same time, a charitable trust can create an income stream for you and an inheritance for your heirs while you’re still alive using the non-income-producing assets you already own. For both types of trusts, you earn the charitable tax deduction, according to current IRS rules, while leaving a portion of these assets to a charity or several charities.

Charitable lead trusts are the opposite of charitable remainder trusts and first make payments to the charity for the trust term. As with charitable remainder trust, payments may be either a fixed amount (charitable lead annuity trust) or a percentage of trust principal (charitable lead trust). At the end of the trust term, the remainder can either go back to the donor or heirs named by the donor. Depending on the type of charitable lead trust, the donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift. Generally, a non-grantor lead trust does not generate a current income tax deduction but eliminates the asset (or part of the asset’s value) from the donor’s estate.

Here are two common strategies:

Set up a donor-advised fund: You don’t have to choose your charity beneficiary when you create your charitable trust. Instead, you can create a donor-advised fund to direct payments from a charitable lead trust or charitable remainder trust to whatever charity (or charities) you eventually select. This gives you the flexibility to change your mind about a charity or add a new charity.

Replace assets for beneficiaries: You have choices for the income a charitable remainder trust creates for you from the sale of your non-income-producing assets. Those looking to leave an inheritance for their beneficiaries, for example, can buy a life insurance policy and use the income produced by the charitable remainder trust to pay the policy premiums while still using the remainder to fund philanthropic intentions.

Creating a charitable trust could be a practical, multipronged approach to leaving a legacy. It allows you to set aside money for both a charity and your beneficiaries, realize specific tax advantages – and have a say over how and when any income should be distributed while you’re still alive.

Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary. At the same time, the public charity or private foundation receives the remainder value when the trust terminates. These “split-interest” trusts are defined in §664 of the Internal Revenue Code and are generally tax-exempt. A section 664 trust makes payments either of a fixed amount (charitable remainder annuity trust) or a percentage of trust principal (charitable remainder trust) to the donor or another named beneficiary. If the trust qualifies under the IRS code, the donor may claim a charitable income tax deduction for their donation to the trust.

Additionally, the donor may not have to pay an immediate capital gains tax when the trust disposes of the appreciated asset and purchases other income-generating assets to fund the trust. At the end of the trust term, which may be based on either lives or a period of years, the charity receives whatever amount is left in the trust. Charitable remainder unitrusts provide some flexibility in the distribution of income. They may be helpful in retirement planning, while charitable remainder annuity trusts paying a fixed dollar amount are more rigid and usually appeal to much older donors unconcerned about inflation’s impact on income distributions which are using cash or marketable securities to fund the trust.

To attain assistance with setting up your Charitable Trust,  Please speak to our Charitable Trust Attorney today.