A charitable trust is a trust made for a charity. In order to be a valid charitable trust, it must have a purpose for the benefit of the public. Charitable purposes include: giving to the poor, advancing education and knowledge, church purposes, promoting health, and advancing government interest such as a park or museum. The beneficiaries in the trust must be indefinite and not to just benefit a few individuals.
The way it usually works is that you first set up a trust, the most common type being a charitable remainder trust. Make sure that the charity you want to donate to is recognized by the IRS and has tax-exempt status. 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 in the trust. The charity will give you or a beneficiary you named a portion of the income made by investing the property and assets for a certain time period, which 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 goes to the charity.
What If the Charitable Purpose Fails?
Usually a charity will shut down or the charitable purpose will become impossible to follow due to an unforeseen event. If the settlor or creator who intended the trust to go to the charity, but the charity no longer exists, the court will use the Cy Pres doctrine and 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 catholic school, but the catholic school shut down after settlor dies, the court will choose another catholic school for the charitable trust.
What Are the Tax Breaks for Me or My Beneficiaries from the Charitable Trust?
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 a deduction, spread over 5 years, for the value of the contribution 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 die, your assets and property put into the trust will 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 a capital gains tax on the property. However, when you put that property in a charitable trust, it is the charity that can sell the property and give you a certain amount of income in return, as charities are not subject to the capital gains tax.
How Do I Receive Income from My Charitable Trust?
There are two common methods for receiving income from your charitable trust:
- Fixed Annuity – You can set an annual income you will receive each year from the charity. Once you set this amount it is irrevocable, so you will always receive the same amount every year.
- Percentage of Assets – Instead of a fixed annuity, you can receive a certain percentage of what the assets are worth in the trust each year. This will help you compensate for economic factors like inflation. Keep in mind, though, if the worth decreases for any reason, the amount you receive that year will decrease as well.
Should I Consult a Lawyer When Planning My Estate?
Planning your estate can be a complex and confusing process. You have many options, and sometimes it is hard to understand the benefits and drawbacks of some of these options. You may want to get help from an estate planning attorney. Your attorney will be able to advise you of what options are available, and help you decide how to organize your estate in a manner most beneficial to you and your beneficiaries.