Charitable trusts are tax-efficient ways to use your assets to provide for both your beneficiaries as well as charity. Many of the trust options also provide you with income during your lifetime. If supporting the causes you cherish most while gaining tax benefits at the same time is important to you then a charitable trust could be a great tool to consider.
There are several types of charitable trusts and each are structured differently. The right choice for you will depend on your needs and what you want the trust to accomplish. If you are thinking about forming one, you should understand how each type works and consider the potential advantages and disadvantages of charitable trusts before making your choice.
What are charitable trusts & how do they work?
Advantages of charitable trusts
Using any form of a charitable trust offers a few potential tax benefits:
- Placing assets in a charitable trust may lower the amount of estate taxes owed when you pass away by reducing the value of your estate.
- You may be able to deduct a portion of donations made to the trust, subject to IRS limits.
- Income earned on investments held by charitable remainder trusts (but not lead trusts) is tax-exempt to the trust.
Potential disadvantages of charitable trusts
While charitable trusts provide many advantages, there are also some possible disadvantages to consider:
- Charitable trusts are often irrevocable. Once you establish the trust, you cannot pull the assets back or alter the terms.
- Because charitable trusts are complex, they may require considerable time and expense to set up. This may not make sense to set up unless you have significant assets to contribute.
- Depending on how the payment is determined and the investment performance of the assets, there may be little or no remainder to distribute when the trust terminates.
The basic types of charitable trusts
The elements described above apply to all types of charitable trusts. In addition to these basic characteristics, the distinguishing factor that defines the specific type of charitable trust is what the charity receives: the remainder or the income.
1. Charitable remainder trusts
This type of trust is most appropriate when you want to leave assets to a charitable organization or support a cause you care about after you pass but still need income from the assets while you are alive. You would not want to choose a charitable remainder trust if you'd like the charity to receive an immediate benefit.
Common types of charitable remainder trusts
Charitable remainder annuity trusts
The amount beneficiaries get must be at least 5% but not more than 50% of the value of the assets at the time they were placed in the trust.
Charitable remainder unitrusts
As with annuity trusts, these pay between 5% and 50% of the trust's value. The difference is that the unitrust payment is recalculated each year based on the current value of the assets in the trust.
2. Charitable lead trusts
Charitable lead trusts can either be grantor or non-grantor trusts, which can significantly affect their tax treatment. A charitable lead trust is often more appropriate when you don't need the assets or the income they could provide during your lifetime but don't want to give the assets away completely. A common reason for this is when the grantor still wishes to
Common types of charitable lead trusts
Charitable lead annuity trusts
Charitable lead annuity trusts pay a fixed dollar amount to a charitable beneficiary during the life of the trust. The remainder value transfers to a noncharitable beneficiary.
Charitable lead unitrusts
Charitable lead unitrusts pay an amount that is recalculated each year based on the value of the trust's assets and the fixed percentage chosen when the trust was established to a charitable beneficiary. Any remaining value when the trust is terminated passes to a noncharitable beneficiary.
Combining charitable trusts with donor-advised funds
Establishing a donor-advised fund and naming it as the charitable beneficiary (either income or remainder) of a charitable trust provides you with even greater flexibility than using a trust alone. Payments from your trust to the donor-advised fund provide you with the same tax advantages as if you had
When you do decide, you'll have the added ability to alter the payment amounts or direct them to a different charitable organization if you choose. Because donor-advised funds have an indefinite life, this can potentially create a legacy of family giving long after you pass away.
Get help determining which type of charitable trust is right for you
Donating to charity is an excellent way to give back to the world, and doing so through your favorite causes can make a significant positive impact that feels personal to who you are. You have many tools to donate at your disposal—some of which also can benefit you, your loved ones and your beneficiaries in both the short and long term.
Not sure which type of charitable trust you should establish or if combining one with a donor-advised fund makes sense for your situation? Connect with a