What Is a Charitable Trust

Assets are held in a charitable trust and then given to charity organizations. You can designate the trust’s management and investment strategy at the time of creation, as well as its donation-making procedures. Creating a charity trust has some tax advantages. However, in comparison to other tax management strategies, these are usually minor unless you are quite affluent. Generally speaking, the best justification for establishing a charitable trust is the desire to establish a consistent method of philanthropic giving.

What Is a Charitable Trust?

A charity trust is a legal body that you establish to own and manage assets, just like any other kind of trust. You and the trust are completely unrelated. It pays taxes, owns the assets it possesses, and needs to be managed in the same way as any other legally recognized organization.

Specifically, a charitable trust can assist in managing donations to charities. It can be set up to donate assets and earnings to charity both during your lifetime and after your death, per your wishes. Charitable trusts are so frequently a major component of estate planning. Since a trust can handle these gifts into the future and even guarantee that an initial gift grows over time, many people will use them to set up continuous gifts.

Occasionally, real estate or other non-fungible property will be managed through the use of a benevolent trust. Let’s take an example where you wish to donate your home to the municipality so that it can be used as a community centre. To retain ownership of the house and manage its upkeep even after your passing, you may establish a charitable trust. Still, this is hardly usual. The majority of charitable trusts only deal in cash, selling off any assets they receive.

A charitable trust, to put it briefly, maintains and oversees assets intended for philanthropic distribution.

Types of Charitable Trusts

Depending on your circumstances and potential goals, there are a few different kinds of charity trusts to take into account.

1. Charitable lead trust

A charitable lead trust allocates income to a nonprofit for a set period. A gift of money or securities to the trust can be used to create the trust. The donor may get a stream of income for the duration of the trust, deductions for gift and estate taxes, and current-year income tax deductions upon donation of assets to the trust, contingent upon the structure chosen.

In the event that a financial donation funds the charitable lead trust, the donor may deduct up to 30% of their adjusted gross income (AGI) in a single year. Generally speaking, any unused deductions are carried over into the next five tax years. Additionally, the deduction limit for other assets, such as appreciated securities, is limited to no more than thirty percent of AGI in the year of the donation. The remaining assets in the charity lead trust pass back to the donor, their heirs, or any chosen beneficiaries after the trust expires. The charity does not receive the assets back.

2. Charitable remainder trust

The operation of a charity-led trust differs slightly from that of a charitable remainder trust (CRT). An irreversible trust financed by money or securities is called a CRT. With the remaining assets in the trust going back to the charity upon your death or the end of the trust period, the CRT gives the donor or other beneficiaries a stream of income.

Two varieties of CRTs exist: An annual fixed amount is distributed as an annuity by a charitable remainder annuity trust, or CRAT; no further contributions are permitted for CRATs. In the meantime, a charitable remainder unitrust, or CRUT, pays out a predetermined portion of the trust’s yearly recalculated value. A CRUT can have further contributions made to it.

The procedures for using a CRT are:

Donate money, stocks, mutual funds, exchange-traded funds (ETFs), or non-publicly traded assets like real estate to the trust; your donation will be partially tax deductible. The type of CRT, the trust’s duration, the anticipated yearly payments (sometimes expressed as a percentage), and the IRS interest rates that establish the asset’s projected growth at the moment all affect how much of a tax deduction is claimed.
Depending on how the trust is set up, you or your designated beneficiaries will get an income stream.
The remaining assets in the CRT revert to the selected charity or charities after a certain period, or upon the death of the final income beneficiary.

Benefits of a charitable trust

A charitable trust is a desirable option for estate planning and other reasons due to its many advantages.
Using a charitable trust to make tax-efficient donations to the nonprofits or charities of your choice is possible. Both the charity and the donor profit from the charitable trust.
When a donation is made to the trust, the donor receives immediate income tax benefits.
You may be able to avoid paying capital gains taxes that would be owed if you donate highly appreciated assets—like stocks, mutual funds, and exchange-traded funds—to the charitable trust instead of selling them outright. Furthermore, when figuring out how much of the donation can be written off for tax purposes, the market value of the assets is taken into account.
In the event of a charity lead trust, the remaining trust balance reverts to the donor or their heirs at the conclusion of a certain period of time. A charitable trust can pay income to the donor or their heirs.
Contributions to a charitable trust can lower inheritance taxes on larger estates and assist lower the value of your estate.

To learn how to take full advantage of these benefits, contact us here

Disadvantages of a charitable trust

Charitable trusts have certain drawbacks despite all of their advantages.

Most of these trusts are irrevocable, which means that even if your circumstances change and you no longer require the funds or assets given to the trust, you are unable to revoke the trust. The trust cannot be dissolved once you decide to create and finance it; the funds are no longer in your possession.
Your share of the trust’s revenue may be deducted from the total amount donated to the nonprofit or charity. A charitable trust might not be the ideal option if your objective is to donate the most money to the charity upfront.
To achieve the dual objectives of giving a sizeable donation to the charity and earning income for you and your heirs, you must contribute a sizeable amount to the trust.

Is a charitable trust right for you?

If you would like to leave a legacy with some of your assets, a charity trust can be a smart choice. Creating a charitable trust may make sense if you have appreciated securities or other assets that you wish to contribute in a method that is tax-efficient and produces income for you or your chosen recipients for a predetermined amount of time.

But if you don’t want to give up ownership of these assets or incur the costs and hassles of establishing the trust through legal counsel, then it might not be the best option for you. You will also need to do the yearly maintenance on it. Establishing a donor-advised fund is a less expensive option that offers many of the same advantages.

If you are considering creating a charity trust or other tax-efficient strategies to donate to nonprofit organizations, it is best to speak with a financial and tax professional. Talk to us here

How to set up a charitable trust

A trust deed establishes the charitable trust. This document establishes the philanthropic goals, the trustees, and the guidelines for the charitable trust. The charitable trust will be created and the philanthropic activities can start right away after the trust deed is signed.

Can you change the beneficiary of a charitable remainder trust?

According to Internal Revenue Code 170(c) requirements, the beneficiary of the charitable residual trust must be a nonprofit, such as a charity, donor-advised fund, private foundation, or religious institution. When creating the trust, the trustor chooses the charity. Let’s say, nevertheless, that they subsequently need to modify the designation. In that scenario, it is advisable to consult an expert or have an impartial trustee handle the matter in order to minimize the possibility of trust assets being given back to the estate for tax purposes.

Bottom Line

A trust that you set up specifically to give assets to a charity is known as a charitable trust. Assets are distributed to designated beneficiaries first in a charitable residual trust, with any remaining assets going to charity after that. Funds are given to charities by charitable lead trusts, with any remaining assets being distributed to designated recipients.