Charitable Trust

What is Charitable Trust?

A charitable trust is essentially a way to organize your assets so that they benefit you, your beneficiaries, and a charity. For philanthropically-minded individuals with non-essential assets, such as stocks or real estate, a charitable trust could provide numerous financial advantages.

But how do these trusts operate? Examine the fundamentals and benefits of charitable trusts to determine if one suits your needs.

Basics of Charitable Trust

Two primary types of charitable trusts exist: charitable lead trusts and charitable remainder trusts. These trust types resemble one another but serve distinct purposes. The chosen charity or charities must be eligible with the Internal Revenue Service (IRS) to receive charitable deductions in accordance with the type of trust and terms you establish.

• Charitable Lead Trust – This type of trust first distributes a portion of its proceeds to a charity, for which you will receive a tax deduction equal to the amount of the payments. The remaining principal balance is then allocated to your beneficiaries.

• Charitable Remainder Trust – With this type of trust, you can choose to receive an income from the distribution of the non-income-producing assets you initially contributed to the trust. You will also receive a tax deduction equal to the present value of the remainder of the assets designated for the charity. At the conclusion of the term or upon your passing, your designated charity receives the remaining assets.

Once you transfer your assets to a charitable trust, it will typically sell them and distribute the proceeds in accordance with the type of trust and the terms you specify. A trust is irrevocable once it has been established, even if you suffer a personal or business financial loss. It can be beneficial to speak with a financial representative to learn more about how a trust could fit into your overall financial plan.

Advantages of Giving

When you give to charity, you can make a difference in the world, and a charitable trust can help you continue giving after your death. It is also a way to put your charitable intentions into action.

Those who want to set aside high-value assets they won’t need to support themselves in retirement can receive numerous tax incentives and financial benefits by establishing a charitable trust. By transferring these assets into a charitable trust, you can avoid paying capital gains tax on the sale of real estate or stocks that have appreciated in value.

Both types of trusts reduce an individual’s estate through charitable contributions, thereby reducing estate taxes.

Additionally, they eliminate the probate process for your beneficiaries. Using non-income-producing assets that you already own, a charitable trust can generate an income stream for you and an inheritance for your beneficiaries while you are still alive. For both types of trusts, if you leave a portion of these assets to a charity or charities, you qualify for a charitable tax deduction under the IRS’s current rules.

Charity Trust Strategies

There are numerous options to consider and strategies for maximizing the benefits of each of the various types of charitable trusts.

Here are two frequent methods:

• Replace assets for beneficiaries / heir: You have options for the income generated from the sale of your non-income-producing assets by a charitable remainder trust. For instance, those who wish to leave an inheritance to their heirs may purchase a life insurance policy and use the income generated by a charitable remainder trust to pay the policy premiums, while using the remainder to fund charitable purposes.

• Set up a donor-advised fund: You are not required to select a charity beneficiary when establishing a charitable trust. You can instead establish a donor-advised fund to direct payments from a charitable lead trust or charitable remainder trust to the charity (or charities) of your choosing. This allows you to alter your mind about a charity or add a new one.

Creating a charitable trust may be an effective, multifaceted strategy for leaving a legacy. It enables you to set aside funds for both a charity and your beneficiaries, realize certain tax advantages, and direct the distribution of income while you are still alive.