When discussing smart ways to do good for others with your money, you may have heard of charitable trusts. Charitable trusts allow you to donate to excellent causes while also offering you and your heirs a tax break, but they aren’t endeavors to take on lightly.
A charitable trust is an irrevocable arrangement that provides lifetime income, beneficial tax breaks and goodwill. Once the trust is in effect, the assets held by the trust are no longer your legal property. In some cases, however, you are still entitled to a portion of the generated income. Since it is irrevocable, it cannot be changed or altered in any way once it takes effect.
Always consider legal relationships like trusts carefully and not without consulting a financial expert. If you are thinking of establishing a charitable trust, however, here’s some information to get you started.
Types of Charitable Trusts
These trusts come in two common types:
- Charitable Lead Trust
- Charitable Remainder Trust
The first of these, charitable lead trusts, make annual payments to a particular charity. When the terms of the trust are over, or when the donor passes away, the trust is transferred to non-charitable beneficiaries, such as the donor’s heirs, free of transfer taxes.
Charitable remainder trusts are basically the reverse: you receive the income during your lifetime, and the charity receives the remainder. You donate your assets to the trust, receive income from the trust, and also defer income tax on the donated assets. After your death, the remainder of the assets pass to the charity.
Both lead and remainder trusts have two variations: annuity or unitrust. Annuity trusts pay out a fixed dollar amount, either to the charitable beneficiary or to the donor. Unitrusts pay out a percentage based on the value of the asset.
Remainder annuity trusts do not allow additional contributions. The fixed dollar amount will not change, regardless of the performance value of the trust. However, the percentage paid in remainder unitrusts varies based on the asset’s value, and you can make additional contributions.
Typically, a charity serves as the trustee. They must have tax-exempt status from the IRS to qualify.
Trustees manage and distribute trust assets. Their duties include:
- ensuring appropriate asset allocation
- making sure distributions are made in accordance with the terms set
- confirming that the type of charitable trust is appropriate for what the donor intends
Simply put, the trustee manages the assets or income for the donor or for whomever they name as their beneficiary.
Don’t Forget the Tax Benefits
Setting up a charitable trust comes with several large tax advantages.
First, you can take an income tax deduction spread out over five years for the value of your charitable gift. This is not necessarily the value of the actual asset. It is usually estimated by the value of income likely to be received, combined with your life expectancy and interest rates.
Remainder trusts pass on the asset to the charity upon the donor’s death, meaning the asset is never part of the estate. As such, it isn’t subjected to estate tax. It is important to note that this only applies specifically to remainder trusts.
Charitable trusts also allow donors to turn appreciated property into cash while avoiding the capital gains tax on the profit. This means you can donate more than if you cashed out the asset before donating.
Reliable Help Setting Up a Charitable Trust
Setting up a charitable trust allows people the ability to help out an organization in need while also providing income for themselves or their beneficiaries. The complexities can be overwhelming. Thus, irrevocable trusts are not something to take on without expert help. Make smart financial moves to help support your charitable endeavors and your beneficiaries. Contact us to connect with an experienced financial advisor and take the first step.