What is a Charitable Trust?

A charitable trust is a type of trust that has one or more charitable beneficiaries, which can provide many benefits to the grantor if utilized properly. Charitable trusts can provide estate and income tax savings, as well as the ability to provide income before and after retirement

What are the different kinds of charitable trusts?

Although a charitable trust can take many forms, there are two main kinds of charitable trusts: charitable lead trusts and charitable remainder trusts. Each trust can either be a unitrust (pays a percentage of the trust value every year) or an annuity trust (pays a set amount each year); each with its benefits and restrictions.

1. Charitable Lead Trusts

Charitable lead trusts function by paying income to a charity on an annual basis. The grantor of the trust sets aside assets which then pay income to the charitable beneficiaries every year. Upon the expiration of the trust, the property is returned to the grantor. This allows the grantor to receive a charitable income tax deduction every year that the trust is operational.

2. Charitable Remainder Trusts

A charitable remainder trust is the opposite of a charitable lead trust. In a charitable remainder trust, the grantor sets aside assets which then pay income to non-charitable beneficiaries every year (usually the grantor or a family member). When the trust expires, the remaining value of the trust passes to the charity as a charitable estate tax deduction.

Other Advantages of a Charitable Trust:

Besides the tax advantages already discussed, a charitable trust has other advantages. The most attractive is that the grantor can place highly appreciated assets (stock, real estate, art) into the charitable trust, and receive income on them without paying capital gains tax. When the grantor begins receiving income from the trust, there will be small capital gains taxes assessed, but these will occur over the length of the trust, rather than in one lump sum.

Another advantage of a charitable trust is that it can be used to provide income for retirement. The terms of the trust can stipulate that the income from the trust be kept in the trust until the grantor retires. This allows the trust property to grow steadily over time and then pay an income to the grantor during retirement.

Like with many estate-planning devices, a charitable trust is best utilized as part of a comprehensive estate plan. If you would like to take advantage of the benefits of a charitable trust, speak with a knowledgeable estate-planning attorney to see if such a trust would be beneficial to your overall estate plan.