There are multiple estate planning tools that people can employ to donate to charities. For example, they can create charitable trusts. While there are numerous benefits to creating charitable trusts, there are factors that some people may find incompatible with their objectives. As such, it is important for people considering creating charitable trusts to fully explore their options before proceeding. If you have questions about charitable trusts and whether they may be right for you, it is wise to seek the advice of a knowledgeable estate planning attorney.
Creating a Charitable Trust
Charitable trusts are similar to other types of trusts, with one key difference: while they are created and funded by the grantor like other trusts, a qualified charitable organization, as defined by the IRS, must be named as one of the beneficiaries. The grantor will also designate a trustee, who is tasked with managing the assets of the trust and distributing any income or principal derived from the trust according to its terms.
Broadly speaking, there are two types of charitable trusts: charitable lead trusts and charitable remainder trusts. In a charitable lead trust, the income the trust produces is distributed to the charity named as a beneficiary for a specified number of years, after which the trust ends, and the assets are distributed to the other named beneficiaries. In a charitable remainder trust, the income produced by the trust goes to non-charity beneficiaries first, and at the end of the trust, the remainder goes to the charity names as a beneficiary.
Pros and Cons of Charitable Trusts
There are numerous benefits to creating a charitable trust. For example, it allows the donor to claim a charitable deduction on their tax return. The amount that the donor can claim depends on multiple factors. Charitable trusts also allow donors to avoid capital gains taxes; in other words, once an asset is transferred to the trust, it is the trust’s property, and because the trust is charitable, the sale of the asset will not attract capital gains taxes. The assets of charitable trusts also do not count as part of the donor’s estate, which can have estate tax benefits for the donor’s beneficiaries.
There are some potential downsides to charitable trusts as well. First, they must be irrevocable, which means that the donor cannot change the terms of the trust, remove assets from it, or terminate it, and some people are not comfortable with this level of inflexibility. Creating a charitable trust is also more complicated than implementing other trusts, and people that attempt to do so alone may make mistakes that could have significant and lasting negative consequences. As such, it is smart for anyone who wants to create a charitable trust to do so with the assistance of an attorney.
Meet with a Seasoned Estate Planning Attorney
Charitable trusts are versatile tools but they are not appropriate for everyone. If you are contemplating creating a charitable trust, please contact our office and we would be happy to speak with you about your options.