Charitable trusts are a gift that keeps on giving. Not only can they fund a meaningful cause, but they can also reduce estate taxes and capital gains taxes in the process. To review how a trust works: A trust is a legal arrangement in which an individual (the grantor) gives control of property to a person or institution (the trustee) to manage for the benefit of beneficiaries.
With a charitable trust, a donor signs over an asset or group of assets to create a charitable trust. The assets are held and managed by the trustee of the trust for a specified period of time, with some or all income that the assets produce, or the assets themselves, going to the charity. Charitable trusts are irrevocable, meaning the trust terms (except in some trusts, the charities which will receive the assets of the trust) cannot be altered nor terminated. A charitable trust can be set up two ways, as a charitable remainder trust, which is more often used, or a charitable lead trust.
A charitable remainder trust will have two beneficiaries. Normally, the grantor, the person creating the trust, is one beneficiary, and the other a qualified charity or tax-exempt organization. During the grantor’s lifetime, he or she receives a set percentage of income from the charitable trust. Once they pass away, the charity then receives whatever is left over. With a charitable lead trust, the charity receives an income from the trust for specified period of time, while the principal of the trust usually passes to the children of the grantor.
Why would someone set up a charitable trust rather than simply donate money to a charity? There can be a significant tax break, particularly for an asset like stocks which can appreciate and lead to capital gains issues and estate taxes if retained in the estate of the grantor.
If you wish to make smaller donations to fund numerous causes that are meaningful to you, then donations or bequests within a will may be a better estate planning option. But if you wish to fund a cause with a significant asset that can offer a tax break while fulfilling a purpose, then speak with a trust attorney regarding this estate planning tool.
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- Dangers of Do-It-Yourself Estate Planning - August 1, 2021
