Charitable Trust

You don’t need to be a millionaire to support causes that are important to you. By including a charitable trust in your estate plan, you create a legacy of good will. This trust can even allow you to support your beneficiaries and your favorite charity from the same pool of money.

A trust is a legal structure, like a mini corporation, with a trustee who holds money or property for the benefit of someone else, called a beneficiary. A charitable trust is a type of trust created for a charitable purpose. Once formed, it can’t be terminated. This means you need to be certain about your decision because you can’t regain control of your money. This article is aimed at helping you decide if a charitable trust is right for you.

Benefits of Charitable Trusts

The benefits of a charitable trust are not just for the extremely rich and famous. It can be an important part of any estate planning program. Consider the following:

  • Share the Joy of Giving: Establishing a charitable trust can be a family activity where you foster the importance of giving in younger generations.
  • Tax Benefits: There are several tax advantages you may receive depending on your financial situation. After funding your charitable trust, you are can take an income tax deduction and spread it over five years for the value of your gift to charity. Next, the property will not be included in your estate for the purposes of determining your estate tax. Finally, you can avoid capital gains tax on sale of assets such as stock or real estate.
  • Receive Income from the Trust: When you set up a charitable trust, you or a beneficiary can receive an income from the trust. Generally, you choose between receiving a fixed dollar amount each year, or a percentage of the current value of the trust.
  • Diversify Investments: A charitable trust allows you to turn property that isn't producing income into cash, and then reinvest it all without paying a tax on any profits gained. For example, if you have $200,000 in stock that has appreciated from $10 a share to $100 a share, you can transfer it into a charitable trust and sell it without incurring capital gains tax. Then you can reinvest the money into other income-producing opportunities.

Types of Charitable Trusts

Charitable trusts are frequently referred to as “split-interest trusts” because these trusts typically have two beneficiaries—one charitable and one non-charitable. To understand this better, let’s look at the two forms a split-interest trusts can take:

Charitable Lead Trust (CLT)

With a CLT, the charity benefits first by receiving income for a pre-determined number of years or for someone’s lifetime. After this period, the remaining assets go to a non-charitable beneficiary. For example, you can direct annual payment to your favorite charity for 20 years, and then have you grandchildren receive the remainder. When the assets are transferred, you will receive an immediate charitable deduction for the IRS-determined value of the gift.

Charitable Remainder Trust (CRT)

A CRT is the most popular form of charitable trust. This trust first makes payments to one or more non-charitable beneficiaries. This can be you or someone you select. The charity will serve as the trustee and will be responsible for investing, protecting and managing the trust funds. The charity will pay the income for the beneficiary’s lifetime, or a pre-determined number of years. At the end of the term, the charity receives the trust’s remaining assets.

Getting Started

First, you need to select the type of trust that best matches your goals and decide how much you can afford to transfer. You can fund the trust with cash, stock, real estate, business interests, art or other valuable assets.

Next, you will set up the trust with a financial institution, such as a bank or investment firm. You will provide detailed instructions on how payment amounts are to be calculated and the frequency payments will be made.

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. Remember in a charitable remainder trust, the charity acts as the trustee and manages the trust to produce income for you or your designated beneficiary.

Free Initial Review of Your Charitable Giving Goals

The rules for charitable trusts are complex so it’s important to work with an experienced attorney. If you’re considering charitable giving as part of your estate plan, an experienced attorney can help you develop a plan that best fits your goals. Receive a free case review by an attorney near you to learn the advantage of including a charitable trust in your estate plan.

Next Steps

Contact a qualified estate planning attorney to help you ensure that your loved ones are cared for and your wishes are honored.

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