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Charitable Trusts Explained

You’ve had a favorite charity for years that you’ve volunteered for, donated to, and steadily supported. Now you’d like to donate some, or all, of your assets to the organization that you hold so dear.

For you, the question isn’t who, but how?


Charitable Trusts 101

First things first: A charitable trust allows you to donate assets to a tax-exempt charitable organization or nonprofit. Establishing this type of trust often comes with certain tax benefits, and they can be structured to provide a steady income for you and your beneficiaries for a set period of time.

Types of charitable trusts include:

• Charitable Lead Trust

A charitable lead trust is an irrevocable trust established to distribute an income stream to a designated charity or nonprofit organization for a specific number of years. The trust can be established with a gift of cash or securities and depending on how the trust is structured the donor can benefit from a stream of income during the life of the trust.

In addition, the donor can benefit from current-year tax deductions when the assets are donated to the trust. If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 30 percent of their adjusted gross income (AGI) in any single year; unused deductions usually can be carried over into the subsequent five tax years. The deduction limit for donated securities or other assets is usually limited to no more than 30 percent of AGI per donation year.

Upon the expiration of the charitable lead trust, any remaining assets in the trust revert back to the donor, their heirs, or designated beneficiaries–not to the charity.

• Charitable Remainder Trust

A charitable lead trust (CRT) is an irrevocable trust funded with cash or securities. A CRT provides the donor or beneficiaries with a stream of income, but the remaining assets in the trust revert to the charity upon the death of the donor or the expiration of the trust period.

A charitable remainder annuity trust (CRAT) distributes a fixed amount annually as an annuity; no additional contributions can be made to a CRAT. A charitable remainder unitrust (CRUT) distributes a fixed percentage of the value of the trust, which is recalculated annually. Additional contributions can be made to a CRUT.


Some Benefits Of Establishing A Charitable Trust…

A charitable trust is a tax-efficient way to donate to charities or nonprofit organizations of your choice. Donating highly appreciated assets like stocks and mutual funds can help you avoid paying capital gains taxes that would be required if such assets were sold outright. In addition, donations to a charitable trust can serve to reduce the value of your estate and lower the estate taxes.

A charitable trust can also serve to provide income to the donor or their heirs, and in the case of a charitable lead trust, the balance remaining in the trust reverts to the donor or heirs at the end of a specified time period.

Establishing a charitable trust can be a good option if you want to create a legacy with some of your assets, or if you have appreciated securities or assets you’d like to donate in a tax-efficient way while also generating income for you or your beneficiaries.

Photo: Salmon

…And Some Disadvantages

In general, charitable trusts are irrevocable, which means you can’t undo the trust if your financial situation changes and you need the money or the assets donated to the trust. Once you have established and funded the trust, it cannot be revoked.

Any income you derive from the trust could reduce the amount that goes to the charity or nonprofit organization. It’s worth noting that you need to make a large enough contribution to the trust that will allow you to make a significant donation to the charity while at the same time providing income to yourself and your heirs.

Keep in mind that establishing a trust generally requires working with an attorney, which will take time and money. It’s recommended that you consult with a financial advisor before establishing a charitable trust.