Help the world—and avoid probate—with a charitable trust

When you contribute to charity, you are making a difference in the world around you. With a charitable trust, you can continue to make an impact even after you are gone. For altruistic and financially savvy individuals with nonessential assets (such as stocks or real estate), a charitable trust could offer tax incentives and several financial benefits for you, your beneficiaries, and a charity of your choice. 

Like any other trust, a charitable trust can be created by transferring assets (usually liquid) to the trust. The trust must fulfill certain requirements in order to be recognized as valid and receive benefits unique to the trust. First, the grantor must have intended to create this specific type of trust. Next, a trustee must be appointed to administer the trust, and beneficiaries should consist of a “charitable beneficiary.” This means that a beneficiary should be assigned that is composed of indefinite persons consisting of a definite segment of the community. Furthermore, it is crucial that these beneficiaries must actually receive the benefit. Finally and most importantly, a charitable purpose must be explicitly outlined. 

A charitable purpose is defend as one that ameliorates, improves, or uplifts humankind “mentally, morally, or physically.” Charitable purposes can aim to foster kindness to animals or people, advance religion, strengthen patriotism, improve community well-being, and more. Some examples of trusts which further these purposes are those which aim to beautify an urban area or village, donate to animal welfare organizations, or erect a monument in honor of a famous historical figure.

Two types of charitable trusts

There are two main types of charitable trusts - charitable remainder trusts and charitable lead trusts. Both trusts require that the chosen charity or charities qualify with the IRS (Internal Revenue Service) to receive charitable deductions. 

Charitable remainder trusts allow assets to be transferred to a charitable organization for a specified amount of time. This could range from a few years to a few decades. During this period, you can choose to receive some income from your assets: while you are donating to charity, the trust can also create an income stream for you and an inheritance for your beneficiaries. After this period is over, the assets (along with any interests or profits it may have generated) become the property of the charity.

There are two types of charitable remainder trusts - charitable remainder annuity trusts and charitable remainder unit trusts.

Charitable remainder annuity trusts pay a non-charitable beneficiary - the grantor or the grantor’s surviving family members - for a period of years. The beneficiaries enjoy a guaranteed income stream for years because the trust pays them in the form of an annuity. This annuity is usually a fixed percentage of the initial value of the trust’s assets, though this percentage cannot be more than 5%. After this period ends, the remaining assets are owned by the charity designated by the trust. 

Charitable remainder unit trusts are very similar to the charitable remainder annuity trust in that they allow the non-charitable beneficiaries to receive an annual income from the trust. However, the difference is that the annual income will fluctuate depending on the annual value and investment performance of the trust. The trust is evaluated at the beginning of each year to determine the amount of income received by the non-charitable beneficiaries. One other advantage of this trust is that it allows the grantor to transfer more funds to the trust at any time. 

In a charitable lead trust, on the other hand, the trust grantor retains control over the assets instead of the charity. It is established for a set period: ten to 20 years is common. During this period, the charities named in the trust must receive interest or profits generated by the assets in the trust. While a portion of the proceeds generated in the trust goes to the charity, you would receive a charitable donation tax deduction equal to those payments.

When the assigned period is over, the remainder of the assets are returned to the “non-charitable beneficiary” assigned by the trust grantor. The lead trust helps those with substantial wealth to avoid gift taxes and estate taxes, but the tax benefits are not comprehensive because the control of the money is always in the hands of the trust grantor. 

Whichever trust you choose, it should be clear that these trusts will not only help you leave a positive legacy, but also benefit financially. Through the trust, you can actively reduce your estate; estate taxes can be reduced and the probate process for your heirs may be eliminated. Furthermore, payment of capital gains tax on high-value, nonessential assets can be avoided. If these advantages are appealing to you, consider creating a charitable trust. 

Depending on your financial situation, it may be wisest to consult with an investment or tax professional first. If so, make sure to consult our concierge service at Peacefully. The concierge service can help with referrals to trusted professionals, offering case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung