A charitable trust enables you to transfer assets to a charity or tax-exempt organization of your choice and offers you a number of tax advantages to assist you reduce any potential tax liabilities. Additionally, charitable trusts can be set up to give you and your beneficiaries a consistent income stream for a predetermined amount of time.
A satisfying method to help a cause you care about passionately and an essential component of your inheritance strategy may be to establish a charity trust.
Charitable trust types
Depending on your circumstances and what you may want to achieve, there are a few different sorts of charity trusts to take into account.
Nonprofit led trust
A charitable lead trust is an irrevocable trust that is created to provide a specified charity or nonprofit organization with an income stream for a predetermined period of time. A gift of money or securities to the trust can be used to create the trust. The donor may gain from a stream of income during the trust’s tenure, deductions for gift and estate taxes, and current-year income tax benefits when the assets are contributed to the trust, depending on the arrangement.
The donor may deduct up to 30% of their adjusted gross income (AGI) in a given year if the charity lead trust is established with a cash donation. In general, any unused deductions may be carried over to the ensuing five tax years. Additionally, the maximum deduction for appreciated securities or other assets is typically capped at 30 percent of AGI in the year of the donation.
The remaining assets in the charitable lead trust revert to the donor, their heirs, or other chosen beneficiaries after the trust expires. The property doesn’t go back to the charity.
Trust for charitable remainder
The operation of a charity lead trust (CLT) and a charitable residual trust (CRT) differ slightly. An irrevocable trust that is financed with money or securities is known as a CRT. The remaining assets in the trust revert to the charity at your death or the end of the trust period, while the CRT provides the donor or other beneficiaries with a stream of income.
CRTs come in two categories: No additional donations may be made to a charitable remainder annuity trust (CRAT), which delivers a fixed sum as an annuity each year. An annual recalculation of the trust’s value determines the distribution percentage for a charitable remainder unitrust, or CRUT. A CRUT can get additional donations.
Using a CRT involves the following steps:
- Donate to the trust money, stocks, ETFs, mutual funds, or non-publicly traded assets like real estate in order to partially reduce your tax obligations. The type of CRT, the length of the trust, the planned yearly payments (often expressed as a percentage), and the IRS interest rates that determine the asset’s projected growth at the time all affect the tax deduction amount.
- Depending on how the trust is set up, you or your designated beneficiaries will get an income stream. According to current IRS regulations, the minimum percentage is 5%; payments may be made monthly, quarterly, or annually.
- The residual assets in the CRT revert to the selected charity or charities after a predetermined period of time or upon the death of the last income beneficiary.
Advantages of a charity trust
A charitable trust has a number of advantages that make it appealing for estate planning and other uses.
- It is tax-efficient to donate to the charities or nonprofit organizations of your choice through a charitable trust. Both the charity and the donor gain from the charitable trust.
- When a donation is made to the trust, the trust offers the donor immediate income tax benefits.
- You can avoid paying capital gains taxes by giving highly appreciated assets, like stocks, ETFs, and mutual funds, to the charitable trust rather than selling them outright. Additionally, when calculating the amount that can be written off as a charitable contribution for tax purposes, the market value of the assets provided is considered to assess the donation’s worth.
- In the case of a charity lead trust, the remaining balance in the trust reverts to the donor or their heirs at the conclusion of a certain period of time. A charitable trust can offer income to the donor or their heirs.
- Giving to a charity trust can lower your estate’s value and lower estate taxes on larger estates.
Problems with a Charitable Trust
Despite all of their advantages, charitable trusts do have certain drawbacks.
These trusts are typically irreversible, which means that if your circumstances change and you find that you need the money or assets donated to the trust, you cannot revoke the trust. The money is no longer in your possession after you decide to create and fund the trust, and you cannot cancel it.
It’s possible that any income you receive from the trust will lower the amount that ultimately goes to the nonprofit or charity. A charitable trust might not be the most effective method to achieve your goal of making the largest direct donation possible to the charity up front.
To achieve the dual objectives of delivering a sizeable donation to the charity and providing income to yourself and your heirs, you must make a sizeable commitment to the trust.
Is a charitable trust the best option for you?
If you want to leave a legacy with some of your assets, a charity trust can be a wise choice. Creating a charitable trust may make sense if you have appreciated securities or other assets and wish to contribute them in a method that is tax-efficient and also provides income for you or other selected beneficiaries over a predetermined period of time.
However, if you don’t want to give up control of these assets or go through the procedure (and expense) of working with an attorney to set up the trust, it might not be the ideal vehicle for you. Additionally, you’ll be responsible for the yearly maintenance. A donor-advised fund is a less expensive option to think about creating that offers many of the same benefits.
If you are considering creating a charity trust or other tax-efficient strategies to donate to nonprofit organizations, it is best to speak with a financial and tax professional.
