In many ways, setting up a charitable trust does what it sounds like. You are setting up a tool by which you will be donating money to charity. In addition to the benefits to the recipient organization, a Charitable Trust can have many benefits to you as well.
Through the use of a charitable trust, you may have the ability to create significant tax savings, receive an income for the rest of your life, and create family bonding opportunities.
A Charitable Remainder Trust (CRT) is an irrevocable trust which generates an income stream to either the donor or beneficiaries of the Trust, for a certain period of time. When the set time has elapsed, any funds remaining in the Trust must be distributed to one or more charities. A CRT can be in the form of a Charitable Remainder Annuity Trust (CRAT), whereby the income beneficiaries receive a fixed dollar amount each year, or a Charitable Remainder Unitrust (CRUT), where the income beneficiaries receive a percentage of the trust assets each year. A CRT is a great way to provide income to yourself or another while eventually giving back.
Additionally, a CRT can create significant tax savings for you when it is funded. As with any charitable donation, the amount you put into the Trust can be claimed as a tax deduction in the year in which you gave that asset to the Trust. Even more significant is that a CRT avoids capital gains tax! CRT’s are a great way to donate a highly appreciated asset and provide benefits to the charity and beneficiaries while reducing tax burdens.
It works like this, when you donate assets into the trust you get an income tax deduction in the year in which you make the donation. This can, and often does bump you down into a lower tax bracket.
Additionally, let’s say you have some old stocks which are worth significantly more now than what you paid for them. If you sell them yourself, you pay capital gains tax on the appreciated amount. If you donate them to a CRT, you get a tax deduction. The CRT then sells the stocks and pays no capital gains tax. The funds in the trust are reinvested and benefits provided per the Trust directives.
A newer benefit of setting up a CRT is related to the handling of an inherited IRA and the changes to the law back in 2020. In a nutshell, under the prior law, a child who inherited an IRA would have to take required minimum distributions. The minimum amount would be based on the child’s life expectancy and be stretched out over many years in most cases. That’s gone. The SECURE Act now requires that in all but a few cases, a child who inherits an IRA must withdraw everything within 10 years. The impact of this is that many people have to pay tax at a higher rate, and over a much shorter time frame.
A CRT is an exception to the 10-year rule. If proceeds from an IRA go to fund a CRT the beneficiary can take distributions for up to 20 years. Anything left after 20 years has elapsed then goes to charity. Often times the beneficiary nets significantly more from this arrangement even though the balance after 20 years goes to charity.
Another type of charitable trust is a Charitable Lead Trust (a “CLT”). A CLT works backwards from a CRT. It is an irrevocable trust that does not pay an income stream to a beneficiary, but an income stream to a charity. When the time frames established have run, the remainder goes to the beneficiaries you designate. As with a CRT, a Charitable Lead Trust provides the donor with an immediate income tax deduction in the year you make the donation.
Regardless of whether a CRT or a CLT is used, the trustee of the trust has a duty to act in good faith and invest the assets prudently, while treating the individual and the charitable beneficiaries equally.
If you’re looking at setting up a charitable trust one of the questions is, “Which charity do I want to give money to?” Many families have a certain charity they prefer, but that can change. In a traditional charitable trust, you are typically locked into the charities chosen at the outset. However, there is another way.
One of the options available is to name or create a “donor-advised fund” to be the beneficiary of a charitable trust. Think of a donor-advised fund as a dedicated separate account for the sole purpose of supporting charitable organizations you care about. No one charity is named to be a permanent beneficiary. The donor-advised fund will receive payments from the trust, and you periodically recommend grants from the donor-advised fund balance to support the charities of your choice.
This has been used in many families to create a meaningful bonding experience. All the kids come to the annual meeting with their preferred charities. Everyone has to justify why their organization is deserving this year. The members then all vote on who gets donations that year. This can continue for as long as there are funds in the account.
Setting up a charitable trust can be complex. You need to take into consideration federal statutes, IRS regulations, and State and local laws. Make sure you speak with a qualified estate planning professional in discussing your options.
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