As generous or as passionate as you may feel toward a specific cause or charity, setting up a charitable trust requires significant planning and even some soul searching. It’s crucial that you understand what you are getting into and what is required of you when you initiate a charitable trust. The best way to accomplish this is to hire an experienced lawyer who can help you make informed decisions that will serve your best interests.
Charitable Trusts are Living Irrevocable Trusts
Since a charitable trust is initiated and funded by someone living, it is a living trust. However, it is also irrevocable. An irrevocable trust has terms that cannot be modified, amended, or terminated. The grantor’s named beneficiaries are the only parties that can consent to such actions. Once the assets are moved into the trust, the grantor is legally relieved of any ownership rights to the assets involved in the trust. The terms of the trust are extremely difficult to modify if they can be modified at all.
One benefit of an irrevocable trust is that it offers some tax-shelter benefits that its revocable counterparts do not. Many people decide to include irrevocable trusts as a part of their estate plan because of the tax breaks it provides, not only to the individual planning their estate but also to their heirs.
Since the settlor or grantor doesn’t own the trust, the assets in the trust are no longer a part of the settlor’s taxable estate. As such, a charitable trust can erase tax liabilities from income that its assets could generate. The exact tax implications can vary by state. Still, these benefits typically cannot be appreciated if the settlor continues to own the trust. Assets in an irrevocable trust can include many items such as cash, businesses, life insurance policies, and investment assets. Even though they no longer own the assets in the trust, settlors can still earn a return on the trust assets investments.
The Difference Between Charitable Remainder Trusts and Charitable Lead Trusts
Charitable Remainder Trust
A charitable remainder trust is a tax-exempt irrevocable trust. This type of charitable trust is intended to decrease an individual’s taxable income by separating their income between trust beneficiaries for a definite time period and then donating the remainder to a designated charity organization. It creates a possible income stream for you, as the donor or other beneficiaries. The remaining donated assets will go to your favorite charity or charities.
The benefits of a charitable remainder trust include:
- Preserving value in highly appreciated assets
- Income tax deductions
- Tax exemptions for investment income
This type of trust might be a good option if you want to transfer appreciated assets to heirs and have the potential to decrease gift or estate tax consequences.
Charitable Lead Trusts
A charitable lead trust is an irrevocable trust that can give financial support to one or more charities for a set term, which might be the remaining lifetime of one or more individuals. Under its conditions, any remaining assets at the pre-determined time will eventually be distributed to family members or other beneficiaries as determined by the settlor. Essentially, a charitable lead trust works inversely to a charitable remainder trust. For a pre-determined length of time, the income stream goes to a charity. After that time, the balance is provided to the original donor or other named beneficiaries.
The benefits of a charitable lead trust include:
- Reducing estate taxes
- Preserving wealth for your heirs
- Reducing gift taxes
A charitable lead trust might be a viable option if you want a charitable deduction right away and need an income stream for yourself or another person.
Is a Charitable Trust Right for You?
Irrevocable trusts such as charitable trusts should not be taken lightly. Although they can form a strong foundation for a long-term estate plan, they can also present some financial and tax burdens if not used correctly.
Keep in mind that these trusts are often used in conjunction with other estate planning techniques and products to maximize their efficiency and that of the overall estate plan. It’s best to consult with your tax and estate planning attorney to determine the products and strategies that fit your goals and situation. At Hackstaff, Snow, Atkinson & Griess, LLC, we have a long track record of helping clients navigate and understand complex estate planning strategies and products. Our knowledgeable attorneys can assist in starting a charitable trust for you today. Call us today to learn more.
