Talking to a financial advisor when you’re including charitable giving in your estate plan is a good idea. They can help you figure out the best way to do it.
A charitable trust holds assets and distributes them to charities. When you create the trust, you get to decide how it handles its money and where it gives it away.
Making a charitable trust can have tax advantages, but if you’re not super rich, these benefits might be small compared to other tax management methods. Usually, the main reason to make a charitable trust is if you want to keep giving to charities for a long time.
How Does It Work?
In essence, charitable giving strategies operate by individuals placing money or assets into them, after which a trustee manages the distribution of these resources to one or multiple beneficiaries at specified intervals.
These trusts support IRS-qualified public charities, and private philanthropic foundations must adhere to specific criteria to attain tax-exempt status. If they fail to meet these requirements, the IRS categorizes them as private foundations, subjecting them to distinct tax laws and guidelines.
The two main categories of charitable trusts are charitable remainder trust (CRT) and charitable lead trusts (CLT).
What Are CRTs?
A CRT is an irrevocable trust arrangement where its assets generate income paid to the donor and a chosen non-charitable beneficiary for a predetermined duration.
Once this offline and online charitable giving period elapses or certain conditions are met, whatever remains of the assets — termed the “remainder” — is directed to a designated charity or charities.
These trusts earn the moniker “split interest” trusts due to their characteristic division of payments between the donor and a non-charitable beneficiary over a set period.
This structure allows for both the support of charitable causes and the provision of trust income to the trust donor or another beneficiary during their lifetime or a specified period.
What Are CLTs?
In a CLT, the assets are allocated to support chosen charitable organizations for a specific duration. Once this timeframe concludes, any remaining assets within the trust are directed to a non-charitable beneficiary’s non-charitable giving account, including family members or other loved ones.
Essentially, the charity receives its benefit first. Afterward, the designated non-charitable beneficiaries receive their share.
Like CRTs, CLTs offer payout structures that can be fixed amounts, resembling regular annual payments like an annuity trust or percentages of the total trust value, functioning as a unit trust.
There are two primary classifications of charitable lead trusts:
Grantor Charitable Lead Trust
In this setup, the individual establishing the trust (the grantor) can claim an immediate tax deduction for the present value of the charitable donation planned for the future.
The specific charitable giving deduction relies on various factors, such as whether the beneficiary is a public charity or a private foundation. Nonetheless, the grantor remains liable to pay taxes on any taxable income generated by the trust’s investments.
Nongrantor Charitable Lead Trust
Contrasting the grantor trust, in a nongrantor trust, the individual setting up the trust (also the grantor) can obtain an immediate tax deduction for the amount designated for beneficiaries at the end of the trust’s term.
Here, the charity (nongrantor) assumes ownership of the assets. The trust assumes the responsibility of paying taxes on any income the trust earns that isn’t distributed to beneficiaries, and the trust, not the individual, claims the charitable giving tax deduction.
Why Set Up a Charitable Trust?
Charitable trust offers several advantages. Here are a few of them.
Income Stream and Ownership Transition
With a charitable remainder trust, you can access income for a predetermined period or until your passing, and afterward, ownership of the assets transfers to the chosen charity. You can decide how you accept payments — annually, for specific durations, or as a percentage of the current property value.
Property Management and Tax Benefit
The charity manages or invests the property within the trust, relieving you of this responsibility. Additionally, upon the trust’s expiration, the property donated to the charity is not subject to federal estate tax.
Income Tax Deductions and Capital Gains
You can spread the charitable giving deduction for the value of your donation over five years, providing more favorable tax treatment. Furthermore, if you contribute appreciated property to the trust, you can convert the growth into cash without incurring capital gains taxes.
Asset Management by Charity
Charities typically sell non-income-producing assets within the trust and reinvest the proceeds in income-generating assets for your benefit. Since charities are tax-exempt, the sale proceeds remain in the trust, untaxed.
Charitable Lead Trust Benefits
Charitable lead trusts aid in avoiding potential gift and estate taxes, making them an attractive option for tax planning strategies.
These structures present an intelligent tax strategy by offering income benefits and ownership transitions to support charitable causes, favorable tax treatment, and efficient asset management.
How Do I Set Up a Charitable Giving Account?
When creating a charitable trust, there are critical choices to consider. Initially, you must decide which assets to place into the trust.
Assets that have appreciated but yield low returns over a year tend to make excellent contributions, offering higher income tax deductions based on their current market value instead of their original cost.
Additionally, you’ll need to determine the beneficiaries and specify the charity you want to support, or if you prefer, establish a charitable foundation bearing your name.
Setting up a charitable trust isn’t a DIY endeavor. It necessitates the expertise of an estate planning attorney to draft the trust document and set the charitable giving fund.
Furthermore, seeking guidance from an estate planning lawyer is advisable when undertaking a significant investment.
Ask Cristy for Legal Help
Are you tired of the complexities of setting up a charitable trust? Seek guidance from Cristy J. Carbón-Gaul, an experienced professional well-versed in crafting personalized solutions for your philanthropic intentions.
With expertise in estate planning, Cristy can guide you through the process, ensuring your aspirations align seamlessly with legal requirements.
Take the first step in creating a lasting impact through charitable giving — reach out to Cristy J. Carbón-Gaul for expert assistance tailored to your philanthropic goals.