If you want to give a big gift to charity, consider a charitable trust.

If you want to make a substantial gift to a charity, it may make sense to use a special kind of trust called a charitable trust. A charitable trust lets you donate generously to charity, and it gives you and your heirs a big tax break.

On the other hand, if you just want to make a few small charitable gifts, then a charitable trust probably isn't worth the bother.

You need to do some serious thinking before setting up a charitable trust. Charitable trusts are irrevocable. Once you create one and it becomes operational, you cannot change your mind and regain legal control of the trust property.

How It Works

The most common type of charitable trust is called a charitable remainder trust. Here's how it usually works.

First, you set up a trust and transfer to it the property you want to donate to a charity. The charity must be approved by the IRS, which usually means it has tax-exempt status under the Internal Revenue Code.

The charity serves as trustee of the trust, and manages or invests the property so it will produce income for you. The charity pays you (or someone you name) a portion of the income generated by the trust property for a certain number of years, or for your whole life -- you specify the payment period in the trust document. Then, at your death or the end of the period you set, the property goes to the charity.

What's in It for You -- Tax Advantages

In addition to helping out your favorite charity, you get several big tax advantages from this arrangement.

Income Tax

You can take an income tax deduction, spread over five years, for the value of your gift to the charity. Where things get tricky is determining the amount of your deduction. The value of your gift is not simply the value of the property; the IRS deducts from that value the amount of income you're likely to receive from the property. For example, if you donate $100,000 but can expect to get $25,000 in income back (based on your life expectancy, interest rates and how the trust document is set up), the value of your gift is $75,000.