You don't need to be a millionaire to support causes that are important to you. By including charitable contributions in your estate plan, you leave a legacy of goodwill.
You can make a one-time charitable gift with your will, or an even bigger difference with a charitable trust. This article explains how charitable trusts operate and the benefits of each type of charitable trust.
What Is a Charitable Trust?
A trust is a legal document that transfers the ownership and management of assets. It will transfer money into the hands of a "fiduciary" called a "trustee." The trustee could be a person or bank or management company. A charitable trust can be set up during the donor's lifetime (called inter vivos) or after death (called testamentary).
To be considered a charitable trust, at least one of the beneficiaries of the trust will be a public charity, nonprofit organization, or private foundation. Depending on the type of trust, the donor and/or their heirs may also be beneficiaries.
Benefits of Charitable Trusts
Charitable giving can be part of any estate plan. The benefits of a charitable trust increase with income level, but the joys of giving are universal.
Here are some other benefits of a charitable trust:
- Create a family legacy: A family charitable trust can foster an ethic of giving in younger generations
- Receive an income stream: Some trusts only provide income for the tax-exempt charitable organization. Others can provide an income stream for the grantor or other beneficiaries.
- Avoid capital gains tax: A charitable trust allows grantors to turn a property that isn't producing income into cash that can be reinvested without paying capital gains tax. For example, $200,000 in stock that has appreciated from $10 a share to $100 a share can be transferred into a charitable trust without incurring capital gains tax.
- Tax benefits (more on this below)
Tax Benefits of Charitable Trusts
The tax advantages of an irrevocable trust will depend on your financial situation. You may be able to take an immediate income tax deduction on your tax return. You may be able to avoid capital gains tax on the sale of appreciated assets. And property transferred into your trust is excluded from the value of your estate after death. If your estate exceeds the Internal Revenue code's exemption limit, a trust can reduce estate taxes.
Types of Charitable Trusts
Charitable trusts that have two beneficiaries—one charitable and one non-charitable—are referred to as “split-interest trusts." There are two types of split-interest trusts: charitable lead trusts and charitable remainder trusts.
Charitable Lead Trust (CLT)
With a charitable lead trust, the charity benefits first. The trust is created for a predetermined number of years (or for someone's lifetime). The donor receives an immediate charitable deduction on their tax return for the value of the gift. The nonprofit receives income from the investment of assets for a specified period of time. At the end of the trust period, or upon the death of the grantor, the remaining assets go to the non-charity beneficiary.
Example: A donor sets up a trust to make a direct annual payment to a favorite charity for 20 years. At the end of that time period, the remainder of the assets is distributed to the donor's grandchildren.
Charitable Remainder Trust (CRT)
A charitable remainder trust is the most popular form of a charitable trust. The charity (or its investment manager) serves as the trustee. It is responsible for investing and managing the trust funds. The charity pays income to the beneficiary who is the donor or someone the donor selects.
This income is paid for the beneficiary's lifetime or for a pre-determined number of years. At the end of the term, the charity receives the trust's remaining assets.
There are two different types of trusts and payment plans:
- If the trust makes regular payments of a fixed amount, it is a charitable remainder annuity trust.
- If the trust pays a percentage of the value of the trust, it is a charitable remainder unitrust.
Life Insurance for Charitable Donations
For those without a large estate, life insurance can be one way to maximize charitable giving. A life insurance policy can fund the creation of a charitable trust.
A charitable giving rider on an insurance policy will pay a percentage of the policy's face value to a charity. Or the entire life insurance policy can be given for charitable purposes upon the donor's death.
Getting Started On Your Charitable Trust
Your first decision in setting up a charitable trust is to select the type of trust that best matches your goals. You may find it helpful to talk to a financial advisor or an estate planning attorney.
Next, take a look at your personal finances and decide how you will fund the trust. Trust assets can include:
- Stocks and bonds
- Real estate
- Business interests
- Other valuable assets
The next step is drafting the legal document that establishes the terms of the trust. You will provide detailed instructions on how payments are to be calculated and the frequency of payments. At this point, you will designate the charity or causes you would like to benefit from the trust. The charity must be an IRS-approved charity.
Next, you will set up the trust with a financial institution, unless you are investing in an already existing charitable remainder trust.
The last step is actually transferring assets into the trust.
Work with an Attorney to Achieve Your Charitable Giving Goals
The rules for charitable trusts are complex. If you are considering charitable giving as part of your estate plan, an experienced estate planning attorney can help.
Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- An attorney is on your side during complicated legal decisions
- Cases with trusts and beneficiaries are rarely cut and dry
- Get tailored advice and ask your legal questions
- Many attorneys offer free consultations