Should a Charitable Trust Be Part of My Estate Plan?

Should a Charitable Trust Be Part of My Estate Plan?

There are many options available to you in designing an estate plan that is just right for you and your goals, and with the help of a trusted advisor you can put the pieces in place in a way that perfectly suits your needs. A charitable trust is one of the many tools you have at your disposal – but only a good estate planning attorney can give you the advice you need you make sure your estate plan suits all of your financial and personal needs.

What’s a Charitable Trust?

These are legal entities that are managed by a charitable organization of your choosing. The organization manages the trust—selling and purchasing income-generating assets as it sees fit—to benefit you, your beneficiaries, and ultimately the charity, which receives a sizable donation for its work in managing your assets.  Whether this entity should be part of your overall estate plan will depend on your unique circumstances and vision for your assets, the size of your estate, and the amount of your intended philanthropic contribution.

Like other trusts, a charitable trust is a legal entity funded be your assets, overseen by a trustee, which avoids probate and comes with several clear tax benefits. Similarly, a charitable trust is private and thus, unlike a gift left to a charitable organization in your will, does not permit your generosity to become public record. Unlike other types of trusts, however, a charitable trust is overseen by a charitable organization and thus requires you to cede some of the autonomy you might otherwise have over your estate. Importantly, a charitable trust is also irrevocable and thus cannot be taken back once it is formed. For this reason alone, it is essential to seek out advice and be sure of your desire to set out on this path before putting the trust into place.

As its name suggests, a charitable trust allows you to include charitable organizations and public entities among your beneficiaries. If you are inclined to give part of your estate away to a cause that is important to you — such as education, poverty-alleviation, housing, environmental sustainability, or justice work, among many others — and are okay with a third party managing your estate under irrevocable terms, a charitable trust can be a great option put your hard-earned assets towards a larger purpose.

How Charitable Trusts Function

In terms of logistics, the charity will either receive its donation before or after you and your beneficiaries receive your income. Under a charitable remainder trust, the charity manages the trust and distributes payments to you or your beneficiaries until the trust terminates (usually at the end of life or after a certain number of years you set in advance), and then receives the remainder in the form of a usually large donation (such that the organization was enticed to accept the gift and its attendant trust-management responsibilities).

Alternatively, a charitable lead trust allows you to make a donation—either fixed or as a percentage of your estate—to the charity or charities and then the rest is distributed to you and your beneficiaries. In either case, the organization you pick is gifted with a generally large donation that assists its mission. Indeed, the opportunity to promote goodwill by creating a charitable trust is a meaningful impetus, providing many donors with a sense of fulfillment from knowing part their estate is serving the public good.


Benefits of Setting Up a Charitable Truest

In addition to fulfilling your heart, charitable trusts come with financial benefits. Because they are managed to appreciate and go up in value, a successful charitable trust will result in higher monetary distributions for all involved. In the case of a charitable remainder trust, you can receive income either as a fixed annuity (a dollar amount that does not change based on inflation—which is less flexible but perhaps appealing to donors who are concerned more about the fixed amount that will be paid) or as a percentage not less than 5% of the trust (which will change as the total value of the trust changes, such as with inflation and appreciation).

Charitable trusts also come with some major tax benefits, specifically when it comes to income, estate, and capital gains taxes:

  • Income Tax Deduction: With a charitable remainder trust, you are entitled to an income tax deduction for the value of your total donation to charity, spread over the course of five years. The IRS calculates the amount of your deduction based on the value of your gift, minus any income you expect to make from the trusts investments.
  • Estate Tax Deduction: Relevant to very large estates, the property that goes to charity either before or after execution of the trust is removed from your estate, and thus is no longer subject to the estate tax at your death.
  • Capital Gains Tax Deduction: The charity running your estate is acting as trustee to appreciate the value of the donation, but charities are not subject to the capital gains tax. Thus, the total value of your charitable trust can go up significantly, resulting in continued income for you without being required to pay a tax on that profit.

In the end, charitable trusts provide philanthropy and tax benefits in exchange for grantor control and revocability. Although they may not be the best estate planning option for donors who wish only to make small charitable gifts, they can be great tax-deducting and income-generating tools for you and your heirs if you want to make a large donation. If want to make sure philanthropy is part of your final estate plan, call the expert estate planning attorneys at M&A Law Firm today.