If you have liquid assets or investments, you may consider putting them into a trust. Trusts are essentially instruments of law set up to hold your assets and distribute them to your beneficiaries. All trusts work to help shelter your investments and assets from tax penalties. So precisely, what is a charitable trust? It’s a trust that allows you to give money to your choice of a charitable organization while receiving the tax benefits of keeping the money in a trust. You and the named beneficiary benefit from this arrangement in different ways.
There are two types of charitable trusts: Charitable Remainder Trusts and Charitable Lead Trusts.
Charitable Remainder Trusts
In a Charitable Remainder Trust, your assets remain in an account that provides income to your designated beneficiary. This type of trust is irrevocable. Irrevocable means that you cannot change your mind and remove your assets from the trust once you fund it. It only terminates on the designated date.
In a Charitable Remainder Trust, your beneficiary benefits with a steady income over the life of the trust. You benefit from the tax benefits of having your assets in a trust. This type of trust can be beneficial in many ways:
- You can name yourself as the beneficiary
- Normally tax-exempt
- No Capital gains tax on the monies used to fund the trust
- Usually, you can claim a charitable income tax deduction
How Does the Charity Benefit?
It is a Charitable “Remainder” Trust because when the trust terminates, the remainder of the monies go to your named charitable organization.
Who is a Charitable Remainder Trust For?
As a parent or grandparent, this type of trust can allow you to set up a child or grandchild with a designated amount of money given at the intervals you choose while you save on taxes. If you want to help a child without providing lump-sum gifts, this could be a suitable type of setup for you and your beneficiary.
As a guardian of a special needs child, this is also a good choice for the income structure that this charitable trust bestows. Someone who needs lifelong income and cannot make their own income could greatly benefit from this type of trust.
Charitable Remainder Trust Payments
You and your estate planning attorney can set up Charitable Trust payouts in two different ways. These types are called Annuity Trusts and Unitrusts.
A Charitable Remainder Unitrust pays a percentage of the principal to the beneficiary. Often, individuals choose a Charitable Remainder Unitrust in retirement planning. The Charitable Remainder Annuity Trust pays a fixed amount to the beneficiary at specified times during the life of the trust.
Charitable Lead Trusts
The other type of charitable trust, called a Charitable Lead Trust, allows the charity to lead the line to receive the monetary benefits of the trust. The charity receives the payments during the life of the trust. The named beneficiary only receives the remainder of the assets after the trust terminates.
Benefits of a Charitable Lead Trust:
- The beneficiary can also be the original donor to the trust.
- At the trust’s termination, the monies can transfer back to you or your heirs.
- You can sometimes claim a charitable income tax deduction
- This type of trust is suitable for someone looking to eliminate part of their estate for tax purposes.
Who is a Charitable Lead Trust For?
Suppose you are interested in giving to a favored charity without constantly setting up payment arrangements. In that case, a Charitable Lead Trust could be a solution for you. Trusts also bestow tax benefits, so discussing your unique situation with an asset protection attorney can help you decide whether this type of trust is for you.
Charitable Lead Trust Payouts
Charitable Lead Annuity Trust pays a fixed amount to the charity at specified intervals during the life of the trust. A Charitable Lead Unitrust pays a percentage of the principal to the beneficiary and is often used by those less concerned about inflation.
We Can Help
A Charitable Trust can let you give to your favorite charity, enjoy tax breaks, and decide how to distribute to beneficiaries. Trusts eventually terminate, and the monies go to the donor, the beneficiary, or the charity.
Speaking to a knowledgeable estate planning attorney can clarify which type of trust would be most beneficial in your situation.
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