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 don't need to be a millionaire to support causes that are important to you. You leave a legacy of goodwill by including charitable contributions in your estate plan. Implementing charitable planning strategies can result in tax savings and benefits to a charity of your choice.
You can make a one-time charitable gift with your will or an even more significant 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 to a fiduciary called a "trustee." The trustee could be a person, a bank, or a management company. A donor can set up a charitable trust during their 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 either:
- A public charity
- Nonprofit organization
- Private foundation
Depending on the type of trust, the donor and their heirs may also be other non-charitable 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. Other benefits of a charitable trust include:
- 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 loved ones and 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: A charitable trust can be important in tax planning for your estate.
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 charitable income tax deduction.
You may avoid capital gains tax on the sale of appreciated assets. And property transferred into your trust is not part of the value of your estate after death. The property avoids probate. A trust can reduce estate taxes if your estate exceeds the Internal Revenue Code's exemption limit.
Types of Charitable Trusts
Charitable trusts have two beneficiaries — one charitable and one non-charitable. Such trusts are "split-interest trusts." Two types of split-interest trusts are charitable lead trusts and charitable remainder trusts.
Charitable Lead Trust (CLT)
With a charitable lead trust, the charity benefits first. The trust operates for pre-determined years (or 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 time. The remaining assets go to the non-charity beneficiary at the end of the trust period or upon the grantor's death.
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, the donor's grandchildren receive the remaining assets.
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. The trustee 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.
The beneficiary receives income for their lifetime or a pre-determined number of years. CRTs become increasingly popular when interest rates rise. 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 a person can set up their entire life insurance policy to be donated 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. Talking to a financial advisor or an estate planning attorney to discuss your options is critical at this stage.
Next, consider your finances and decide how to fund the trust. You can fund the trust from various types of assets, including the following:
- Stocks and bonds
- Real estate
- Business interests
- Any other valuable asset
The next step is drafting the legal document that establishes the terms of the trust. You will provide detailed instructions on how to calculate payments and the frequency of the payments. At this point, you will designate the charity or causes you would like to benefit from the trust. Make sure the charity is IRS-approved.
Next, you will set up the trust with a financial institution unless you invest in an already existing charitable remainder trust. The last step is transferring assets into the trust. Once transferred to the trust, the assets become trust assets.
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. The attorney can explain your legal options.
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