A trust is a legal device that a property owner may use to transfer that property to a beneficiary through a third party, called a trustee. A trustee is responsible for managing the property on behalf of the beneficiary.
A trust is an efficient way for an individual to transfer their assets in a manner that they can manage and control. For example, if the property owner places specific conditions on the trust property, those conditions must be met prior to the trustee transferring the property to the beneficiary.
A charitable trust is a trust that is created for charitable purposes. In order to be a legal and valid trust, the general purpose of the charitable trust must be to benefit the public good. Such purposes may include:
- Providing for the poor, such as a homeless shelter or food bank;
- Advancing knowledge and education, such as with a scholarship fund;
- Religious or church purposes, which may include leaving a trust to a specific church or religious organization;
- Promoting public health, such as a community health clinic; and
- The advancement of public government interests such as parks, museums, etc.
The beneficiary or beneficiaries of the charitable trust must be indefinite and cannot be an individual. In other words, the trust beneficiary cannot be a person but must be an organization or group. The charity then acts as the trustee of the trust and oversees the distributions to the recipients.
There are several different types of charitable trusts, including:
- Charitable remainder trusts (CRT);
- Charitable lead trusts (CLT);
- Private foundations; and
- Pooled charitable trusts.
How are Charitable Trusts Set Up?
The first step in setting up a charitable trust is to contact an experienced attorney for help to ensure the trust will be legal and valid. The most common type of charitable trust is the charitable remainder trust.
The individual creating the trust must ensure the charity they wish to provide a donation to is recognized by the IRS and has tax-exempt status. The trust creator, or grantor, will then need to place any assets or property they wish to donate to that charity into that trust.
The chosen charity will then act as the trustee by determining how to best invest the property and assets held in the trust. The charity will provide the grantor or a named beneficiary a portion of the income made by the investment of the property and assets for a specified time period.
The specified time period will be included in the trust document. It could be as long as the grantor is alive, or any other time period the grantor chooses. At the end of the time period specified, the property remaining in the trust will be transferred to the charity.
Are There Any Tax Breaks for Me or My Beneficiaries from the Charitable Trust?
Yes, there are certain tax breaks the grantor and the beneficiaries may take advantage of from the charitable trust. These include:
- Income tax benefits;
- Estate tax benefits; and
- Capital gains tax benefits.
An individual can receive an income tax deduction that is spread over 5 years for the value of their contribution. This will be based on the individual’s life expectancy, interest rates, and how the trust document is set up.
If the individual’s estate is worth enough to be subject to the federal estate tax when they pass away, their assets and property may be put into the trust. Their assets will then not be a part of that taxable estate because whatever is contained in the trust goes to the charity after they pass away.
Typically, if an individual were to sell property that has gone up in value since they bought it, they would have to pay a capital gains tax on the property. However, when they place that property in a charitable trust, the charity can then sell the property and give them a certain amount of income in return because charities are not subject to the capital gains tax.
Can I Receive Income from My Charitable Trust?
Yes, it is possible to receive income from a charitable trust. The two methods are a fixed annuity and a percentage of assets.
An individual can select an annual income they will receive every year from the charity in a fixed annuity. Once this amount is set, it is irrevocable, or cannot be changed. The individual will then receive the same amount every year.
Another option is to receive a percentage of the value of the assets that are in the trust each year. This may help compensate for economic factors including inflation. It is important to note that if the value of the property in the trust decreases, the amount the individual receives will also decrease.
What if the Charitable Purpose Fails?
A charity may shut down or the charitable purpose of the charity may become impossible to follow due to an unforeseen event. If the creator intended for their property to go to charity, but that charity no longer exists, they may have a few options to proceed.
For example, the court may use the Cy Pres doctrine. Pursuant to this doctrine, the court will choose a charity that is as near as possible to the settlor’s charitable intent. For example, if the grantor desired that the trust property go to a certain school but that school shut down after the grantor passed away, the court may choose another similar school to benefit from the trust.
The goal of a charitable trust is for the property to benefit others generally and not a specific individual. Therefore, choosing another similar charity to benefit should not present major issues.
What are Some Common Disputes Associated With Charitable Trusts?
The majority of trust related disputes arise when the trustee breaches their various fiduciary duties. This may involve the mismanagement of the trust by the trustee. For example, if the trustee fails to provide an accurate accounting record for the charity.
The trustee is obligated to act in a way that serves the beneficiaries and not their own personal goals or needs. A common dispute involving charitable trusts is when a trustee uses the trust funds for their own personal use and against the goals of the trust.
Other types of disputes that may arise involving a charitable trust include, but are not limited to:
- A dispute regarding the true purpose of the trust since the trust must be for a charitable purpose that benefits the public;
- Trustee mismanagement of trust assets;
- Failing to invest the trust funds with sound business judgment; and
- Violation of federal, state, or local trusts laws, such as failing to report trust activity in order to avoid tax reporting.
A dispute may also arise if the trust beneficiaries disagree regarding the construction of the trust. For example,
- Whether the trustor had legal capacity, or was of sound mind, to create the trust in the first place;
- Whether the trustor was coerced or pressured into forming the trust, such as being unduly influenced; and
- Whether the trust was created fraudulently, such as the signature on the trust documents being forged.
How are Charitable Trust Disputes Resolved?
The manner in which a charitable trust dispute is resolved depends on the type of trust that is being disputed as well as the nature of the legal issues and applicable laws. General resolutions may include:
- Replacing or removing the trustee;
- Redrafting the trust documents;
- Awarding damages to the beneficiary; and
- Criminal consequences for the trustee that are associated with breach of fiduciary duties.
A court may also provide alternative remedies. For example, a court may declare the trust invalid if the purpose does not match the requirements for a charitable trust.
Do I Need to Hire a Lawyer for Help with a Charitable Trust?
Yes, it is essential to have the assistance of an experienced trust lawyer for any charitable trust issues you may have. Creating a trust can be a complex process and you want to ensure your hard-earned property is benefiting the charity you desire.
A charitable trust attorney can advise you of the types of trusts and determine which may best suit your needs. Your attorney will help you organize your estate in the manner which is most beneficial to you and your beneficiaries.