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A charitable trust allows you to donate assets to a chosen tax-exempt charitable organization or nonprofit and comes with certain tax benefits to help you minimize what you might owe to the government. Charitable trusts can also be structured to provide a reliable income stream to you and your beneficiaries for a set period of time.
Establishing a charitable trust can be an important part of your estate plan and a rewarding way to make an impact for a cause you care deeply about.
There are a few types of charitable trusts to consider based on your situation and what you may be looking to accomplish.
A charitable lead trust is an irrevocable trust that is established to distribute an income stream to a designated charity or nonprofit organization for a set number of years. The trust can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes and current year income tax deductions when the assets are donated to the trust.
If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 30 percent of their adjusted gross income (AGI) in any single year. Any unused deductions can generally be carried over into the subsequent five tax years. The deduction limit for appreciated securities or other assets is also generally limited to no more than 30 percent of AGI in the year of the donation.
Upon the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs or designated beneficiaries. The assets do not revert to the charity.
A charitable remainder trust (CRT) works a bit differently than a charitable lead trust. A CRT is an irrevocable trust that is funded with cash or securities. The CRT provides the donor or other beneficiaries with a stream of income with the remaining assets in the trust reverting to the charity upon your death or the expiration of the trust period.
There are two types of CRTs: A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year; no additional contributions can be made to a CRAT. Meanwhile, a charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated annually. Additional contributions can be made to a CRUT.
The steps when using a CRT are:
There are several benefits of a charitable trust that make them attractive for estate planning and other purposes.
For all their benefits, charitable trusts do have some disadvantages as well.
A charitable trust may be a good option if you have a desire to create a legacy with some of your assets. If you have appreciated securities or other assets and want to donate them in a tax-efficient way that also generates income for you or designated beneficiaries over a specified period, establishing a charitable trust could make sense.
It might not be the best vehicle for you, however, if you don’t want to give up control of these assets or go through the process (and cost) of working with an attorney to establish the trust. You’ll also have to perform the annual work to maintain it. A less-costly alternative to consider setting up — that comes with many of the same benefits — is a donor-advised fund.
It’s best to consult with a financial and tax advisor if you are thinking about establishing a charitable trust or other tax-efficient ways of making donations to nonprofit organizations.
