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A charitable trust is an irrevocable trust that can benefit you and the charity you choose, while providing income to your heirs. If you are philanthropically minded with nonessential assets like stocks or real estate, a charitable trust can offer many financial advantages for all involved. Once in place, a charitable trust is irrevocable even if you experience a personal or business financial loss.
Types of Charitable Trusts
Charitable Lead Trust (CLT) – Designed to distribute a portion of proceeds to charity, a CLT allows a tax deduction equal to the payments made to the trust. The remainder of the principal is distributed to beneficiaries.
Charitable Remainder Trust (CRT) – Income can be designated to individuals by distributing non-income-producing assets previously placed in the trust. A charitable donations tax deduction is applied to assets remaining in the trust for the charity. The chosen charity receives these assets when the trust ends or upon your death.
There are many options and strategies to maximize the benefits of each trust type. Neither trust requires you to choose your charity beneficiary. By creating a donor-advised fund, you direct payments to your chosen charities. This offers flexibility to change your mind about an existing charity or add a new one.
Income Producing Trusts
For income-producing purposes, a charitable remainder trust provides options from the sale of your non-income-producing assets. For example, purchasing a life insurance policy with premiums paid by the charitable remainder trust allows you to use residual funds to support philanthropic interests.
Charitable remainder trusts are also called split-interest trusts. Payments are made from income first to the beneficiary(s) in a set amount, with the remaining income supporting the charitable organization. This is the opposite of a charitable lead trust. Often the grantor is the primary beneficiary, with contingent beneficiaries named after the grantor’s death.
The two ways to receive trust payments in a charitable remainder trust are either a fixed annuity or a percent of trust assets known as a unitrust.
Fixed Annuity and Unitrusts
In a charitable remainder annuity trust, you can’t change the annuity amount once the trust is created. Therefore, it is best to over-fund rather than not have enough. An annuity trust provides a fixed dollar amount each year even if the trust’s income is less than anticipated.
A charitable remainder unitrust allows the beneficiary to receive a fixed percentage of the trust’s assets each year. The trust is appraised annually to determine the dollar amount of the set percentage for distribution. This funding method adjusts income according to the trust’s success. Payments increase in good years and decrease in years when assets underperform. When trust payments are not the main source of income for beneficiaries, this can be a good option. The IRS requires a minimum five percent distribution of the trust valuation annually.
Professional Help to Design Your Charitable Trust
Working with an estate planning attorney to create a charitable trust can help determine which trust type is best for your goals and what assets to place in the trust. Your attorney will help you identify beneficiaries, payment strategies, and the value of your tax deduction. Once you have the trust document, assets are moved to fund the charitable trust.
The charity you choose may have rules regarding how and when to donate. Speak with the organization before creating the charitable trust. You can use the trust to reduce your income, estate, and capital gains taxes by making 501(c)(3) donations to a charity while providing a steady income to heirs. Creating a charitable trust is a practical but complex approach to leaving your legacy to both a charity and your beneficiaries while realizing specific tax advantages. Speak with one of our experienced elder law and estate planning attorneys by contacting our office today at 1 (800) 680-1717.