What is a charitable trust?
A charitable trust is one that designates a charitable organization as its beneficiary. A charitable trust provides trustors with the ability to remove wealth from their estate without the penalties associated with gift, income, and estate taxes. In fact, Congress is so strongly in favor of philanthropy that they allow a 100 percent deduction for assets placed into a charitable trust. There are three distinct forms of charitable trust, each with its own design and purpose.
Charitable Lead Trusts
A charitable lead trust allows a trustor to donate an asset’s income interest to a charity for a period of time, at the end of which, the remainder interest passes to a private party, typically children or grandchildren for a specified number of years. In other words, the charitable trust will receive annual payments during the life of the trustor or for a specified amount of time. When this time is up, the actual corpus, or contents, of the charitable trust is returned to the family.
With a charitable lead trust, the trustor or the trustor’s estate will receive income tax deductions only for the value of the income interest, not for the corpus, which will be included in the deceased person’s estate. Because of the increased tax burden, this form of charitable trust is usually written to take effect at the death of the trustor.
Charitable Remainder Annuity Trusts
This is a type of charitable trust into which the trustor transfers assets in exchange for a fixed annuity income of at least 5 percent of the original value of the assets transferred into the trust, payable at least annually, usually for life. The value of the remainder is deductible on the income tax return. In other words, the trustor will make income off of the trust at a value of 5 percent each year, but the actual corpus of the trust is donated to charity when the trustor dies. This means that there are no estate taxes paid for the corpus of the trust.
Charitable Remainder Unitrust
This is a type of charitable trust that is similar to a charitable remainder annuity trust, except that the annual income depends on a fixed percentage of the current market value of the assets in the trust, determined annually. This form of charitable trust is especially useful for those who already have existing retirement income and are not concerned with the fluctuations in the market value of the charitable trust. Once again, the corpus of the charitable trust is donated to charity on the death of the trustor and there are no estate taxes paid for the corpus.
Charitable Trusts as a Pooled Income Fund
This is a type of charitable trust that is an investment fund created and maintained by a charity which “pools” property from many similar contributors instead of making each trustor form their own separate trust. The allows the trustor to avoid the expenses and time required for planning a charitable trust. The one catch with this form of charitable trust is that it is typically limited to cash and cash equivalent transfers. So property cannot be placed directly into the trust, but must be sold and the proceeds placed into the trust.
A charitable trust can be very complex and must meet specific IRS phrasing to be considered valid. If you considering a charitable trust for your estate planning portfolio, contact an estate planning attorney.