If you’ve spent time watching PBS, you’re probably familiar with the charitable trusts that sponsor many programs. What you may not know, however, is that you don’t have to be fabulously wealthy to establish one. Charitable trusts can be a part of ANY family’s financial plan—providing both flexibility and control over your planned giving.
In addition to the obvious benefits of helping those in need and supporting the work of organizations you feel passionate about, charitable trusts may provide:
- Income tax deductions based on the value of your gift
- Lower estate taxes and gift taxes (depending on the structure you choose)
- A way to sell highly appreciated assets such as stocks or real estate that preserves their full value, rather than having them reduced by capital gains taxes
There are two basic types of charitable trusts: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). The primary difference between the two comes down to a matter of who receives the income stream during the life of the trust, and who receives the remaining assets when the trust ends.
Charitable Lead Trusts
With a CLT, you transfer property to a trust that’s set up to benefit a qualified 501(c)(3) charity of your choice. The charity receives the income from the trust for a set period of years (or the life of the donor), after which time the remaining assets are passed back to either the donor or his/her beneficiary according to the terms of the trust. If you’re currently making regular gifts to a favorite charity (or would like to make regular gifts to a charity), a CLT may offer a more efficient way to make those gifts.
Charitable Remainder Trusts
CRTs are basically the mirror opposite of CLTs. The trust pays you, you and your spouse, or someone else you’ve chosen as your beneficiary an income for life (or a set period of years). The trust ends at the death of the last income beneficiary (or a fixed number of years if that’s what the trust specifies), and the charity then receives all remaining assets. A CRT funded with highly appreciated assets allows the trust beneficiary to benefit from the sale of that property without paying capital gains tax.
CRTs can also provide a simple way to generate income from assets or property that wouldn’t otherwise do so. The trust is able to tax-efficiently sell the assets and provide you with an income stream (either now or in the future) with the designated charity receiving the remaining assets.
There are, however, costs associated with setting up and maintaining a charitable trust. And assets placed in the trust are irrevocable. Additionally, the IRS has specific rules governing the percentage of trust assets that must be received by the charity to qualify for tax benefits. So make sure you have both a strong charitable desire as well as enough other assets to sustain you throughout retirement.
With a CLT, you transfer property to a trust that’s set up to benefit a qualified 501(c)(3) charity of your choice. The charity receives the income from the trust for a set period of years (or the life of the donor), after which time the remaining assets are passed back to either the donor or his/her beneficiary according to the terms of the trust. If you’re currently making regular gifts to a favorite charity (or would like to make regular gifts to a charity), a CLT may offer a more efficient way to make those gifts.