Charitable Trust

When you set up a charitable trust, you can provide ongoing income for three different parties:

• Yourself

• The beneficiaries you name

• A tax-exempt charity or nonprofit group that you admire

Indeed, the opportunity to be philanthropic makes this trust a popular investment option.

Types of Charitable Trusts

To start with, here are the two major categories of charitable trusts:

1. Charitable Lead Trust

To establish a charitable lead trust (CLT), you'd fund this account with securities or cash. Of course, a charitable trust attorney could assist you with this process. Your CLT would then provide a certain amount of income to your designated charity for a certain number of years. Be aware that, when a CLT expires, the remaining assets will not go to the charity. Rather, they'll revert to you or to your beneficiaries. 

In any event, once it's set up, your CLT could help you in a few different ways:

• First, you could earn an income tax deduction for the tax year when you donated your assets.

• Second, you'd earn some income from that trust for as long as it's active.

• Third, you'd be eligible for estate tax deductions.

In fact, if you made your trust donation in cash, you could deduct as much as 30% of your adjusted gross income (AGI) that tax year. Donating other assets could result in significant AGI deductions as well.

Plus, if you forgot to claim that deduction that year, you'd have five more years in which you could do so.

2. Charitable Remainder Trusts

Then there's the charitable remainder trust (CRT) option. As with a CLT, a CRT will provide you with a stream of income — along with your beneficiaries and your charitable organization. However, if this living trust expires, its leftover assets will go to the charity. That's a key difference between CLTs and CRTs.

Likewise, if you and your beneficiaries were to expire before your CRT, the charity would receive the remaining assets. To establish a CRT, you'd donate cash or assets like stocks, mutual funds, real estate, or exchange-traded funds. At that point, you'd have some decisions to make:

• How many beneficiaries will you have, and who will they be?

• How often will those payments be made: once a year, four times a year, or once a month?

• What percentage of the trust will be distributed as payments each time? (Right now, the IRS says that 5% is the lowest amount that can be sent out.)

CRTs themselves fall into two basic categories. The first is called a charitable remainder annuity trust (CRAT). Once you set up a CRAT, you can't contribute to it ever again, and a set percentage of it will be distributed annually.

The second type is the charitable remainder unitrust (CRUT). If you you have this kind of trust, you can keep adding to it over time.

A set percentage of a CRUT is distributed each year. But, if you keep contributing to this fund, the amount of those annuities will grow proportionately larger.

Benefits of Charitable Trusts

These trusts are appealing for numerous reasons. For starters, you can earn income tax benefits as soon as you make your first contribution.

Later on, since the value of your estate has gone down due to that contribution, your estate taxes would decrease accordingly.

Also, you'd benefit if you donated an appreciated asset — one that keeps growing in value over time, like a mutual fund or a stock. That's because you'd avoid the capital gains taxes you'd pay if you sold those items instead.

Not to mention, it can be a real comfort to know that you're supporting your loved ones through a living trust. And, especially important, you can help sustain an organization and promote a cause that are meaningful to you.

Is a Charitable Trust Right for You?

Advantageous as they are, these trusts aren't right for everyone. Financial planning is idiosyncratic, and different people succeed with different types of investments.

For instance, if you're at all unsure about your financial circumstances or where you might be financially in several years, you should probably stay away from charitable trusts. After all, they're irrevocable trusts — you can't take money out of them once you've put it in.

For that reason, these trusts are ideal for non-core assets as well as assets that aren't currently generating income for you: certain real estate holdings, for example.

Furthermore, are you well-off financially, and would you like to give as much money to a charity as possible? If so, you'd probably be better off just making a direct donation to an organization. These trusts, after all, divvy up funds between charities, donors, and their beneficiaries.

When it comes to protecting your assets and preserving wealth for future generations, you can’t afford to make mistakes. Seek experienced legal counsel from a qualified estate-planner at Citadel Law Corporation before you get started. Call (800) 662-0882 today and set up a consultation with one of our attorneys.