Trusts Law

Charitable Trust

Suppose you want to give away something valuable, like cash or stocks, but you want to give it to people who need it. And you don’t want to give it away all at once. What you can do is put that valuable stuff in a special container. Then you can appoint a trusted person to manage the stuff in the container, but they have to follow your instructions. For example, they can only give the stuff in the container to charities that help animals.

That’s the idea behind a charitable trust.

This article explains charitable trusts. Setting up a trust is complicated, so you should contact an estate planning attorney near you if you want to create a charitable trust. An experienced attorney can give you legal advice about your unique situation and how to create a plan that will honor your wishes.

What Is a Charitable Trust?

A charitable trust is a type of irrevocable trust you create for charitable purposes. The trust distributes its assets and income according to the terms of the trust. It can make donations to charitable and nonprofit organizations.

Your trust’s donations can happen while you’re alive and after you die. You can also fashion your trust to give your family a reliable income stream.

A charitable trust typically holds cash, securities, or property. Trusts that hold securities or property usually sell these items and then make charitable donations in cash.

Charitable trusts are complex legal documents. You will likely need the help of an attorney, financial advisor, and tax professional to create one.

What Are the Types of Charitable Trusts?

We can divide charitable trusts into two general types. They are the charitable lead trust and the charitable remainder trust. The primary difference is when the trust makes distributions to the charitable beneficiary.

Charitable Lead Trust

A charitable lead trust makes donations to a charity for a set amount of time. The time can be a specified number of years or the life of one or more people. After this lead period ends, what’s left in the trust is paid to the noncharitable beneficiary.

Charitable Remainder Trust

A charitable remainder trust (CRT) is the reverse of a charitable lead trust. In a CRT, the trust makes distributions to the noncharitable beneficiary for a set time. After this period ends, the remainder of the trust goes to the named charity.

What Are the Advantages of a Charitable Trust?

Charitable trusts are beneficial in several ways:

  • Your initial donation to the trust is tax deductible. That makes it a tax-efficient way to give to charitable organizations.
  • Donating valuable assets can help you avoid capital gains tax. An added benefit is that you can use the asset’s market value when making deductions on your income tax.
  • Donations can lower the size of your estate and reduce estate taxes.

What Are the Disadvantages of a Charitable Trust?

Charitable trusts promote charitable giving. But they have their drawbacks:

  • They are irrevocable. It can be hard to change or revoke the trust once you make it. That means you can’t change the charities you name in the trust. You can use a donor-advised fund to overcome this limitation.
  • Creating and managing a charitable trust is complex. You will likely need the help of legal, financial, and tax professionals. And that means management fees can add up.
  • You specify the general purpose of the trust when you create it. But you lose day-to-day control over the assets in the trust.
  • Charitable trusts aren’t tax-exempt. That means the IRS will tax you on the income from the trust’s assets.

How Do I Create a Charitable Trust?

Creating a charitable trust is complex. The first step is to draft the trust document. You’re called the grantor since you’re making the trust.

You’ll have to decide who you want as a trustee. They’re responsible for investing the trust’s assets. They also make distributions from the trust.

A trust beneficiary is someone who receives trust payments. You’ll have charitable and noncharitable beneficiaries in a charitable trust. So you’ll have to decide what charities you want to support. You’ll also have to determine if you want a lead or remainder trust.

Next, you need to transfer your assets to the trust. You’ll need to know the proper way to move your assets. You must also understand any legal considerations, such as possible tax implications.

Contact an Estate Planning Lawyer for Help

You can accomplish your charitable giving goals with a charitable trust. But charitable trusts are complex estate planning documents. You must understand the advantages and disadvantages of using this type of trust. An experienced estate planning attorney can help you determine if a charitable trust is right for you. They can also ensure your trust is correct and achieves your goals.

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