A charitable trust is a type of trust that is made for a charity. In order to be a valid charitable trust, it must have the general purpose of benefiting the public good. For the purpose of such trusts, “charitable purposes” include: 

  • Giving to the poor; 
  • Advancing education and knowledge; 
  • Church or religious purposes; 
  • Promoting health; and 
  • Advancing public government interests such as a park or museum. 

In order for a charitable trust to be valid, the beneficiaries in the trust must be indefinite, and must not just benefit a few specific individuals.

How are Charitable Trusts Set Up?

The way charitable trusts usually work is that you first set up a trust, the most common type being a charitable remainder trust. You must ensure that the charity you want to donate to is recognized by the IRS and has tax-exempt status. You’ll need to put any assets or property you want to donate to the charity group into your trust.

The charity will act as the trustee by deciding how to invest the property and assets being held in the trust. The charity will give you or a named beneficiary a portion of the income made by investing the property and assets for a certain time period. This could be as long as the rest of your life (you get to specify the payment period in the trust document). At the end of this time period, the property in the trust is then transferred to the charity.

Are there any Tax Breaks for Me or My Beneficiaries from the Charitable Trust?

Yes – there are certain tax breaks you and your beneficiaries can incur as a reward for you good services to charity:

  • Income Tax: You can receive an income tax deduction, spread over 5 years, for the value of the contribution. This will be based on your life expectancy, interest rates and how the trust document is set up;
  • Estate Tax: If your estate is worth enough to be subject to the federal estate tax when you pass away, your assets and property put into the trust. Your assets will then not be a part of that taxable estate, since whatever is in the trust goes to the charity after you die;
  • Capital Gains Tax: Usually, if you were to sell property that has gone up in value since you bought it, you would have to pay what is called a “capital gains tax” on the property. However, when you place that property in a charitable trust, the charity can then sell the property and give you a certain amount of income in return. This is because charities are not subject to the capital gains tax.

Can I Receive Income from My Charitable Trust?

Yes, there are two common methods for receiving income from a charitable trust. These are:

  • Fixed Annuity: You can set an annual income amount that you will receive every year from the charity. Once you set this amount, it is irrevocable (i.e., cannot be changed), so you will always receive the same amount every year;
  • Percentage of Assets: Instead of fixed annuity payments, you can receive a certain percentage of the assets’ worth in the trust each year. This will help compensate for economic factors such as inflation. Keep in mind, though, if the worth of the property decreases for any reason, the amount you receive that year will also decrease.

What if the Charitable Purpose Fails?

In some cases, a charity might shut down or the charitable purpose will become impossible to follow on account of some unforeseen event. If the settlor or creator intended the trust to go to charity, but the charity specified no longer exists, then they may have some options in order to proceed. For instance, the court can use the Cy Pres doctrine. Under this doctrine, they will choose a charity that is “as near as possible” to the settlor’s charitable intent.

For example, if the settlor wanted his trust property to advance a certain school, but the school shut down after settlor dies, then the court will choose another similar school for the charitable trust. Thus the creator of the trust might not have the property go to the exact school they picked; instead, the property might advance to a similar school. 

This should not present major issues, since the purpose of a charitable purpose is a general one and not directed toward any specific person or individual. The goal is to go to a charity. If the settlor has questions or issues, then they should consult with a lawyer, who can further explain their options under the trust laws of their state.

Do I Need to Hire a Lawyer for Help with a Charitable Trust?

Setting up a trust can often be a complex process. You have many options under estate laws, and sometimes it is hard to understand the benefits and drawbacks of these options. You may want to seek help from a wills, trusts, and estates attorney. An attorney near you can advise you of what options are available, and can help you decide how to organize your estate in a manner most beneficial to you and your beneficiaries.