Trusts offer a number of benefits like tax savings and avoidance of probate while also serving various purposes. One such purpose is to provide for causes that the donor (the individual who creates the trust) would like to support. In fact, when a charitable trust is properly set up by an experienced estate planning attorney, it can benefit the donor, chosen beneficiaries, and a charity all at once. If you reside in Ascension Parish or Prairieville and have questions about charitable trusts, connect today with Kallio Law Firm.
The Different Types of Charitable Trusts
Charitable trusts are divided into two main groups: charitable remainder trusts and charitable lead trusts. They share one important characteristic, that the selected charity must meet certain Internal Revenue Service (IRS) requirements concerning taxes and other matters. A careful estate planner should understand the key distinctions between charitable remainder and charitable lead trusts, which are as follows.
Charitable remainder trusts
These trusts provide a stream of income to the donor or another beneficiary for a certain period of time, after which whatever assets are left over will be distributed to a designated charity. Because this type of trust is irrevocable, the donor must relinquish ownership and title to the property that is placed in it. This category may be further broken down into these subtypes:
- Charitable Remainder Annuity Trust (CRAT): A CRAT pays to the trust beneficiary a fixed annuity each year.
- Charitable Remainder Unitrust (CRUT): This type of trust will, on an annual basis, pay the beneficiary a fixed percentage of the value of the trust assets.
Charitable lead trusts
Charitable lead trusts are also irrevocable. They provide income to one or more charities for a specific amount of time, after which the remaining trust property is given to the donor or another beneficiary. These trusts can also be subdivided into the following categories:
- Charitable Lead Annuity Trust (CLAT): The charity will receive a fixed annuity payment each year from the trust.
- Charitable Lead Unitrust (CLUT): A CLUT will provide annual payment to the charity as a fixed percentage of the trust assets.
Additional Options for Charitable Trusts
Estate planners may also choose to create the following types of trusts to meet their personal and charitable objectives:
- Donor-advised fund: This type of charitable trust allows someone to donate but also to suggest grants to charities over a period of time.
- Private foundation: With a large donation you can fund a private foundation, a type of charitable trust that a board of directors would manage.
- Community foundation: On the other hand, a community foundation serves a particular geographic area while supporting different philanthropic activities.
The Basics of Establishing a Charitable Trust
There are three elements that every charitable trust needs to have before it can be formally established:
- Donor: The person who establishes a charitable trust is called a donor. This individual is also responsible for funding the trust as more fully described below.
- Trustee: A trustee is a fiduciary, meaning the law entrusts this person with a high level of responsibility to act in the interests of others. The trustee is primarily responsible for managing trust assets and making distributions in accordance with the trust instructions.
- Beneficiary: A trust beneficiary is someone who, as the term implies, benefits from the trust and its assets. Beneficiaries of charitable trusts include the charities themselves or, as in the case of charitable lead trusts, the donor or someone else.
The donor establishes an irrevocable trust (meaning it cannot be revoked once it is created) and selects a trustee, who is usually a financial or legal professional, to be in charge of it. The charity that is to benefit from the trust should be one that is legally recognized and meets all applicable IRS rules and regulations.
The donor will fund the trust with appreciable assets such as publicly traded stocks or real property. The trustee manages and invests assets, and earnings and growth will occur tax-free. Distributions are made periodically to either the donor or the charity, depending on whichever type above is selected. Later, when the trust terminates, any trust property that is left over is given to the donor, their heirs, or their chosen charity.
Advantages of Charitable Trusts
There are several positive reasons to include a charitable trust in your comprehensive estate plan. Among them are:
- Philanthropy: The donor can create a meaningful and lasting legacy by supporting social and other causes in which he or she strongly believes. The donor can also specify how funds are to be used, which helps ensure that the assets truly advance the donor’s charitable goals.
- Tax deduction: The donor can claim a tax deduction based on the value of the assets that fund the charitable trust. Also, by placing assets in this irrevocable trust, they are no longer considered the donor’s property. This enables the donor to remove the assets from their estate and thereby have lower estate tax liabilities.
- Income stream: Charitable remainder trusts provide an income stream to the donor. A retired or fixed-income individual can particularly benefit from this arrangement. The income stream must be carefully planned so the charity can still receive assets when the trust terminates, so work with a knowledgeable attorney to create your trust.
- Asset diversification: Most financial planners recommend that investors have a diverse investment portfolio. Diversification allows one to mitigate the risks of market fluctuations and economic downturns. Charitable trusts are a great addition to a diverse portfolio.
Contact Our Charitable Trust Attorney
When a client retains Kallio Law Firm, we get started by reviewing their overall estate planning objectives to determine whether a charitable trust may fit in with it. Then, we discuss the different types of charitable remainder and charitable lead trusts and explain how they work, their advantages, and their drawbacks. Finally, we carefully draft the trust instrument and help you establish and fund it.
Get started with your personalized trust and estate plan by contacting our office today.