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Have you heard about the charitable trust?
Are you interested because you have always wanted to share your assets with some charities in your community?
Or, maybe you are considering this because of the charitable tax deduction it offers?
If you have questions like these then keep reading, this page will help you understand any of those questions.
Charitable trusts allow you to structure your assets in a way that will benefit not only your charitable foundation but also you and your beneficiaries. You can do this while you are living or after you are gone through your will. The charity is the one responsible for managing the assets for a specific time. All—or some—of the interests earned by the said assets will go to the charity.
A lead trust and a remainder trust are two different types of charitable trusts.
Because a charitable trust is created to support one or more charitable activities, it exists to benefit one or more communities depending on your chosen purpose and the amount you want them to receive.
Most charitable trusts exist for these reasons:
Therefore, when you create a charitable trust, you are making an impact on communities and people that you are sure to leave behind a legacy.
More than the charitable purpose, this type of trust offers tax incentives and financial benefits. As you move your assets into a charitable trust, you will no longer pay for capital gains on real estate or stocks.
An irrevocable trust, the charitable lead trust is created to offer financial support to one or more chosen charities for a specific set of time. It is a gift in the form of cash or property which serves as the charities’ income stream. The donor benefits from a charitable income tax deduction, as well as estate or tax deductions, on the donated assets depending on how the charitable lead trust is structured. As the trust term expires, the remaining assets are then given out to the non-charitable beneficiaries, which are typically family members of the benefactor.
A charitable lead trust works in such a way that you, as the person who creates this trust, donate payments to fund the trust and, therefore, support your chosen charity or charities for a specific amount of time. It can either be a specified number of years or until your lifetime.
With the setup, you continuously make charitable donations every month but without the need to release payments. When the trust term ends, the non-charitable beneficiary or beneficiaries inherit the remaining balance and, subsequently, enjoy the tax reduction and other possible tax benefits, including savings on gift and estate taxes. This is why a charitable lead trust is created during the estate planning or the benefactor’s writing of the will. Typically, the setup, which may require you to get assistance from an attorney with expertise in estate planning, these costs can vary depending on the situation.
Charitable Lead Trusts can offer many benefits, such as:
1. With the total trust payments made to charity or charities, you can expect deductions from estate and gift taxes.
2. Increase in the trust assets will not have capital gain taxes after these are transferred to the non-charitable beneficiaries at the end of the trust period and will not be subjected to the estate or gift taxes.
3. Some non-grantor trusts get to enjoy income tax deductions.
4. As soon as the assets are already placed in the charitable lead trust, the benefactor is no longer responsible for managing the trust, as well as investing the assets. The management team from charities will be the one to do these tasks for the donor.
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Charitable lead trusts are not without disadvantages.
Here are some of them:
1. A charitable lead trust is irrevocable. Once you have transferred your assets to the trust, you can no longer reverse your decision to remove them from the trust. You will have to wait until the trust term expires. It is designed this way to make sure that your chosen charity or charities will receive what you promised.
2. The heirs or the non-charitable beneficiaries may receive less than what you intend them to have because there is a possibility that the asset values will go down. It is for this reason that you highly consider the market timing before setting up the charitable lead trust. You must be able to create it when interest rates are rising.
3. When the trust term is completed, the assets received by the heirs are taxable as a gift and eventually lower the estate tax exemption of the donor.
Similar to charitable lead trust, a charitable remainder trust is an irrevocable and tax-exempt trust. Because it is irrevocable, you cannot modify or terminate this trust without consent from the beneficiary. As the grantor, you have transferred your assets into the trust. This, subsequently, takes away all your rights of ownership.
A Charitable remainder trust works in two ways. First, it serves as a potential income stream for you, as the donor, for a specific term. It can be years or for life, depending on its structure. Second, it helps you achieve your dream of giving to others as the remaining donated assets go to the charity or charities you selected as the trust term ends. A charitable remainder trust, in the process, helps reduce your taxable income as you distribute your income to the beneficiaries on the set time and donate the rest to the charities of your choice.
In charitable remainder trust, you move your appreciated asset into a trust—irrevocable at that. Consequently, this takes out the asset from your estate and frees it from estate taxes when you are gone.
Additionally, you get an instant charitable income tax deduction. The trustee puts the asset on the market at the highest possible value without the obligation to pay for capital gains tax and then reinvest the proceeds in assets that also generate income.
Therefore, you receive an income from the trust as long as you live. When you die, however, the charities you’ve chosen will get the remaining trust assets.
You may be asking: Why can’t I just do the selling of the assets myself, as well as reinvesting?
Well, you can do that. However, you will end up paying more taxes.
On the other hand, if you do it through the charitable remainder trust, as mentioned earlier, you are immediately granted a charitable income tax deduction and you do not have to pay capital gains tax.
Speaking of income, you can get a fixed percentage from the trust assets if you chose the charitable remainder unitrust. However, there’s a possibility of your yearly income fluctuating. This still depends on the performance of your investment, as well as the yearly value of the trust. But, if what you have is the charitable remainder annuity trust, you can choose to have a fixed income. Unlike the charitable remainder unitrust, the charitable remainder annuity trust lets you receive a permanent income regardless of its performance.
Which one is a good option? It really depends on you. If you want to be sure of the income you receive each year, the annuity trust is for you. However, if you want protection from fluctuation, then unitrust is better.
After knowing its definition, types, advantages, and disadvantages, can you now say if a charitable trust is the right one for you? If you have more questions before you make a decision, consult with us and an estate attorney who is an expert in charitable lead trusts.
If you’re considering a charitable lead trust then contact Heritage Law today! We can help you understand the details of charitable trusts more and, in the end, help you make a well-informed decision. Our goal of helping clients with estate planning is always to provide proper guidance and to ensure that you are able to achieve your desired goals, avoid probate, and minimize taxes.
Heritage Law is founded in Omaha, Nebraska, and serves clients in Nebraska as well as Iowa. If you’re looking for a personalized estate planning experience with a lawyer who cares, John Diamantis can assist you in all of your unique needs. We love when our clients leave feeling confident in the estate plan we help them create. We are here to ensure you are taken care of from start to finish and look forward to helping you on your journey.
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