In short, charitable giving occurs when a charitable donor gives some of their assets to a charitable cause, such as a non-profit charitable organization. A charitable organization is an organization that exists to help individuals or communities in need, by fulfilling the needs of those less fortunate.
For example, a charitable organization may provide food, water, shelter, education, or other necessities. The charitable organization may also be set up to provide a specific need based on a donor’s wishes. For instance, a donor may wish to create or donate to a charitable organization that provides art equipment to the youth in their area.
It is important to note that charitable giving may be done in life or death, as an individual’s estate may continue to donate to a charitable organization after the death of the donor. Legally, charitable giving is most commonly set up via a will or a charitable trust. Although charitable giving arises from the compassion, generosity, and benevolence of a donor, charitable giving also provides tax breaks for the donor or the donor’s heirs.
What Is a Charitable Trust?
A trust is a legal relationship wherein one party, known as the trustor or settlor, transfers property into a trust that is managed by a second party, known as a trustee, for the benefit of another party, known as the beneficiary. Similar to other trusts, a charitable trust is set up when a trustor, here the donor, donates some of their assets or property into a trust.
Typically a charitable trust is managed by a charitable organization that is either setup by the trustor, or otherwise exists to manage trust funds on behalf of specified beneficiaries. The main difference between a charitable trust and other trusts is that a charitable trust is always irrevocable. This means that once a valid charitable trust is created, the donor may not later revoke the trust or reclaim their property interests in the trust property.
In order to be valid, a charitable trust must be irrevocable, and the beneficiaries named in the trust must be indefinite. One of the most common charitable trusts is a charitable remainder trust. Further, the charitable trust must be created for the purpose of benefiting the public good, i.e. the trust must have a charitable purpose. Examples of charitable purposes include, but are not limited to the following:
- Providing food, water, clothing, shelter, or other necessities to the poor;
- Advancing education or knowledge, such as music or art education or creating scholarships;
- Religious purposes, such as trusts setup for churches or religious outreach;
- Promoting health and wellness; and/or
- Advancing other public interests such as trusts created to maintain public parks, provide funding to museums, or create or maintain public art, etc.
How Do I Create a Charitable Trust Remainder?
Creating a charitable remainder trust is not often a complicated process. In order to create a charitable remainder trust, the trust creator (settlor or trustor) must select or create a non-profit charity. Next, the trustor will then donate their assets or property into the charity’s trust account. The charitable organization will serve as the trustee and manage the trust property and assets so that it produces income.
That income will then be payable to the trustor for a period of time, or until the death of the donor if no time period is designated. At the end of the period of time designated, or the death of the donor, the property and assets will then become sole property of the charitable organization. The charitable organization will then continue to invest the trust property and assets for the benefit of the public good.
Can I Receive Income From a Charitable Trust?
In short, yes. As noted above, a donor may receive income from a charitable trust. There are two common methods for receiving income from a charitable trust:
- Trust Income as a Percentage of Assets: This form of trust, also known as a unitrust, is organized to provide income payments based on a percentage of the value of the trust’s assets. This form of trust income payments typically accounts for economic factors such as inflation, as the assets are revalued each year. However, if the value of the trust assets decreases, such as due to an economic depression, the amount of income received from the trust will also decrease; and
- Fixed Annuity Trust: With a fixed annuity trust, the rate of income received from the trust is fixed from the date the trust was originally created. This means that the amount of income received from the trust will always be the same and cannot be changed.
Do Charitable Trusts Grant Any Tax Breaks for Donors or a Donor’s Heirs?
One of the main benefits of setting up a charitable trust is that charitable trusts grant significant tax breaks. Some of the tax breaks that a donor or donor’s heirs may receive include, but are not limited to the following:
Income Tax Deductions:The main advantage of setting up a charitable trust is that it provides an income tax deduction, which is spread over 5 years for the value of the charitable donation;
Reduction of Estate Taxes: If an individual’s estate is large enough to be subject to a federal or local estate tax when they pass away, that individual can shift assets or property into a charitable trust to avoid paying estate taxes. Any assets transferred to a charitable trust will not be included in an individual’s taxable estate. Once again, this is because whatever is transferred to a charitable trust becomes property of the charity upon the death of the donor; and
Reduction of Capital Gains Taxes: Typically, if an individual sells a piece of property that has increased in value since the time they acquired the property, that individual would have to pay a capital gains tax on the property. However, if that piece of property is instead placed in a charitable trust, the charity can sell the property without having to pay a capital gains tax, and then the donor can receive a certain amount of income in return. This is because charities are not subject to capital gains tax.
As can be seen, there are significant tax advantages to utilizing a charitable remainder trust. For example, highly appreciated property, such as a stock portfolio or real estate may be donated to a charitable organization and pay income for the life of the grantor, while avoiding certain taxes. In such a case, the real estate will continue to grow in value, but will not be subject to a capital gains tax, if and when the charity chooses to sell the property.
Further, the donor will continue to receive income from the charitable remainder trust. For the stock portfolio, income will continue to be paid to the donor, but that income will be reported to the IRS as taxable income. Importantly, the donation itself will be tax deductible.
Further, if the donor does not need income at any point in time, the income can remain in the trust, and grow in the trust tax free. Thus, trusts are good for reducing taxes, or avoiding taxes such as estate taxes outright. This is why many donors utilize charitable remainder trusts as a sort of retirement plan, as trust distributions can be deferred until a later date.
Do I Need an Attorney for Issues with Charitable Giving?
As mentioned above, there are many benefits to charitable giving. Therefore, if you are contemplating forming a charitable trust, you should contact a knowledgeable and skilled estate lawyer in your area. An experienced and local estate attorney will be able to help you properly create a charitable trust and manage your estate.
Further, an attorney will be familiar with all of the tax implications of forming a charitable trust and estate planning, and will be able to explain the benefits and disadvantages to forming a trust. Finally, an attorney will be able to represent you or your heirs in court, should any issues arise with your charitable giving.