Giving to charity can feel rewarding and benefits good causes. For the most part, we give gifts while we are alive and receive benefits on our income taxes. Charitable gifts can also be used to reduce estate and capital gains taxes if you create a trust specifically for a charitable purpose. Assets put into these trusts may be used as income tax deductions or are removed from your estate to reduce estate taxes.
You give up legal control of assets in a charitable trust. The trusts are irrevocable and cannot be altered or revoked and can only be managed as specified in the trust document, but assets are not available to creditors or for lawsuit settlements.
Donations to the trust are considered a “split interest” because there are two beneficiaries; one charitable and one non-charitable. A specific public charity, private foundation, or other non-profit organization will usually be the beneficiaries of the trust. The non-charitable beneficiaries will usually be your family or occasionally yourself. The two major differences between the different types, whether or not the charity is the:
As with all trusts, you will appoint a trustee, name beneficiaries, and include instructions in the trust document which will guide how the trust is managed, even if the charity is the trustee. They are quite complicated and subject to many IRS rules, so should be created by a professional. They are set-up in financial institutions such as a bank or investment firm.
A charitable trust is most useful for giving large sums of money, enough to make a significant impact on estate taxes when you are well over the estate tax limit ($11,700,000 in 2021).
If you would like the flexibility to change charities or give to multiple charities, you can create a donor-advised fund.
Make sure the charity is approved by the Internal Revenue Service. This usually means having tax-exempt status under the Internal Revenue Code.
Charitable trusts can be complicated and are subject to specific IRS rules which determine what percentage of the trust can be used for deductions.
Unless the charity/beneficiary agrees, you cannot get these assets back or otherwise alter the trust while it exists.
There are 2 different types to choose from.
Charitable Remainder Trust
Charitable Lead Trust
While you’re alive
Before or after your death
Usually the charity, but they can hire professional trustee
Grantor Charitable Lead Trust – you, a person close to you, or a professional trustee
Non-grantor Charitable Lead Trust – usually the charity, but they can hire professional trustee
Grantor Charitable Lead Trust – you
Non-grantor Charitable Lead Trust – the charity
Possible financial benefits
Reduction of income tax based on potential amount going to the charity
Reduction of estate value at your death by the amount left for charity
No capital gains tax when trust increases in value
You, your family, or any co-trustor
If terminated while you’re alive
Your heirs and family after your death
Maximum of 20 years
No time limit, although most are 10-20 years
Trustee can change beneficiary
A Charitable Remainder Trust is the most common charitable trust and is established as part of an estate plan. It is an irrevocable living trust that is created while you are alive that provides income for you, your family, or other beneficiary. The charity will usually be the trustee and is the final beneficiary when the trust expires and gets the ‘remainder’ of the funds in the trust.
Details of the Charitable Remainder Trust.
The trust is created and funded during your lifetime with the amount you would like to leave that charity after the trust ends.
In addition to cash, they can be funded with publicly traded securities, some types of closely held stock (not S-Corp stock), real estate without a mortgage, business interests, certain other complex assets, and art or other valuable assets.
You can take an immediate charitable income tax deduction based on the trust’s assets that will eventually pass to charity and spread it over five years.
Once the trust is funded it is irrevocable and the charity usually becomes the trustee as well as the beneficiary.
The trustee protects and manages the trust, including investing the assets to increase its value.
Once formed, the trust is used to generate income for you, your family, or any co-trustor.
There are three ways to determine the income that will be provided by the trust. The first two are similar to the grantor retained income trust.
The CRAT provides a fixed income/annuity each year despite the value and earnings of the trust or your changing needs.
Although the trustee of the CRAT can buy and sell assets, you cannot add additional assets once it is formed.
The CRUT provides a yearly income based on a fixed annual percentage of the balance of the trust assets.
You can make additional contributions to a CRUT which will increase the value and income of the trust.
You can use the trust to avoid capital gains tax on the sale of assets that have significantly increased in value, such as stock or real estate.
The remaining assets in the trust then go to the charity when it ends, either at your death or after a specified period of your choice, not to exceed 20 years.
A charitable lead trust can be a living trust created while you are alive or a testamentary trust created after your death. It is an irrevocable trust that provides income for your chosen charity for a certain amount of time. The charity ‘leads’ the way by being the first beneficiary, after which the assets go to you (living trust only) or a person or group of persons you name as beneficiary. Unlike a Charitable Remainder Trust, there is no limit to how long this trust can exist.
There are multiple options to consider when creating a Living Charitable Lead Trust, each may have different tax considerations.
A reversionary trust where the assets remaining after the trust expires revert to you or a non-reversionary where they will be distributed to other beneficiaries not related to the charity.
Details of the Charitable Lead Trust
In addition to money, assets such as publicly traded stock, real estate, private business interests and private company stock could be contributed.
The charity will be the first to benefit by receiving income for a predetermined time or when a specific event occurs, such as your, your spouse’s, or your children’s death.
Depending on the type of lead trust, you or your beneficiaries may be entitled to some financial benefits while the charity is receiving income from the trust.
With a grantor charitable lead trust you are the owner, so any income that goes to the charity essentially comes from you.
With a non-grantor charitable lead trust the charity is the owner and you do not have access to assets in the trust or any income they may generate for the duration of the trust.
After this period, the remaining assets go to a beneficiary of your choice, although they cannot be affiliated with the charity. For example, you can direct annual payment to your favorite charity for 20 years, and then have your grandchildren receive the remainder when your child, their parent, dies.