Before discussing the benefits of charitable trusts, let’s define the term:
Charitable trust: a trust set up for the benefit of the public usually setting out a definite charitable purpose for an undetermined number of beneficiaries.
These trusts can be either inter-vivos (set up during a person’s life) or testamentary (set up in the person’s Will) and are aimed to provide for the needs of the selected charity. When structured properly, charitable trusts can be used to benefit the charities of your choice and help to reduce your tax obligations as follows:
Charitable Remainder Trust
This is the most common type of charitable trust. With a properly created charitable remainder trust, the grantor or the grantor’s beneficiaries receive payment of a specified amount at least annually during the term of the trust. When the trust expires, the designated charity receives the assets that remain.
For you, the grantor, this provides several potential tax benefits:
(1) Assets placed in the trust may qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.
(2) At death, trust assets are not subject to death taxes because they are no longer part of the grantor’s taxable estate.
(3) Any appreciated assets in the trust are also exempt from current capital gains tax.
Charitable Lead Trust
A charitable lead trust allows the grantor’s assets to provide income to a charity during the term of the trust. When the trust expires, the remaining assets are paid to the grantor or the grantor’s beneficiaries. This type of trust could potentially reduce capital gains taxes, death taxes, or gift taxes most notably on highly appreciated assets.
Since charitable trusts involve a complex web of tax rules and regulations, always seek advice from an experienced elder law attorney or estate planning professional as well as tax advisors before creating these vehicles. Are you interested in leaving a lasting legacy? Feel free to contact Mike, an elder law attorney with a unique background in finance.