A trust is a legal entity to which a property owner, called the “trustor,” may transfer property for the benefit of a third party, called the “beneficiary.”. A trustee is a person or institution made responsible for managing the trust property on behalf of the beneficiary.
A trust is an efficient way for a person to transfer their assets in a way that they can manage and control. For example, if the trustor places specific conditions on the trust, these conditions must be met before the trustee may transfer the property to the beneficiary.
A charitable trust is a trust that is created to serve charitable purposes. For a charitable trust to be legal and valid, the general purpose of it must be to benefit the public good. For example, such purposes would include the following:
- Providing for the poor by donating funds to a homeless shelter or food bank.
- Advancing knowledge and education, such as through a scholarship fund.
- Funding a charity that serves religious purposes, which may include leaving a trust for the benefit of a specific church or religious organization.
- Promoting public health by donating to a community health clinic.
- Advancing the public interest by donating to parks, museums, and other cultural institutions that serve the public.
The beneficiary of a charitable trust cannot be one person only. It must be an organization or a group. Trusts are creations of state law, and tax law also has an important impact, so it is important for a person to know and apply the law of the state where they live if they want to set up a valid charitable trust.
Among the several different types of charitable trusts are the following:
- Charitable Remainder Trusts: A charitable remainder trust is a tax-exempt and irrevocable trust. They are used to lower the taxable income of the trustor. To set one up, the donor makes a gift of assets to the trust, providing a partial tax deduction.
- These trusts then operate by distributing income to either the trustor or one or more named non-charitable beneficiaries for a specified period of time. After the time has expired, the remainder is donated to one or more designated charitable beneficiaries, which may be a public charity or a private foundation.
- Charitable Lead Trusts: As noted above, this type of charitable trust allows the trustor to receive an income from the trust.
- Pooled Charitable Trusts: A pooled charitable trust is set up and managed by a qualified nonprofit organization. The fund receives irrevocable contributions from individuals, a family, or a charity. It may receive contributions from several different sources, and the donors may get a tax deduction in the tax year in which the donation is made.
- They then must pay income tax on the income they receive annually from the trust. The fund invests the contributions to provide dividends for the fund donors. The donors are paid income distributions during their lifetimes. After the donor or donors have passed away, the fund distributes the remaining assets to a designated charity or charities.
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 that a person chooses the right type of trust and then that it is set up as required by their state’s law.
The person who creates the trust must ensure that the charity they wish to benefit is recognized by the Internal Revenue Service (IRS) and has tax-exempt status. The trustor then needs to select the assets they wish to use to fund the trust and arrange the transfers. Again, the advice of an attorney may be helpful in this regard.
The specified life of the trust may be included in the trust document. It could be as long as the trustor is alive or any other time period the trustor chooses. At the end of the time period specified, the property remaining in the trust would be transferred to the charity.
Are There Any Tax Breaks for Me or My Beneficiaries From the Charitable Trust?
There may be tax advantages for the trustor, the trust, and or the beneficiaries of a charitable trust in the following areas:
- Income tax benefits that apply to income realized by the trust or to the trustor when they transfer assets to the trust;
- Estate tax benefits may be available for the trustor; and
- Capital gains tax benefits for the trustor or the trust.
If the person’s estate is large enough to be subject to the federal estate tax when the person passes away, the estate tax may be avoided if certain assets are placed in a charitable trust.
Typically, if a person were to sell property that has gone up in value since it was purchased, they might have to pay a capital gains tax on the property. However, if the property is donated to a charitable trust, it might be possible to avoid paying capital gains tax.
According to the IRS, however, the IRS treats a charitable trust like a private foundation unless it meets the requirements for treatment as a public charity. So, a charitable trust is not treated as a charitable organization for purposes of exemption from taxation. So, the trust is subject to the excise tax on its investment income as required by the rules that apply to taxable foundations.
Tax laws are complicated, and the tax implications of setting up a charitable trust for the trustor, the trust itself, and the beneficiary of the trust are all topics that a person would best discuss with a qualified tax attorney.
Can I Receive Income From My Charitable Trust?
A charitable lead trust is an irrevocable trust set up to distribute income to a specified charity or nonprofit organization for a fixed number of years. It is possible for the trustor of a charitable trust to receive income from the trust. As mentioned above, for example, a trustor might set up a charitable lead trust and choose to receive an annual income from it.
A charitable lead trust can be established with a gift of cash or securities. Depending on the structure, the trustor can receive an income from the trust during their life. In the year when the assets are donated to the trust, the trustor can also receive deductions for gift and estate taxes and income tax deductions for income realized in the same year as that in which the assets are transferred to the trust.
What if the Charitable Purpose Fails?
A charity may shut down, or the charitable purpose of the charity may become impossible to achieve due to an unforeseen event. If the creator intended for their property to go to charity, but that charity no longer exists, there may be a few alternative options.
For example, the court may apply the Cy Pres doctrine. Under this doctrine, the court may choose a different charity whose work aligns as nearly as possible with the grantor’s charitable goal. For instance, if the grantor wanted the trust to benefit 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 That Involve Charitable Trusts?
Disputes can arise in connection with charitable trusts in any number of ways. For example, a trustee might breach their fiduciary duty, which may happen if the trustee mismanages the trust assets. For instance, the trustee may fail to accurately account for the charity.
The trustee is obligated to act in a way that serves the interest of the beneficiaries and not their own interests. A dispute can arise if a trustee uses the trust funds for their own personal benefit and not that of the trust beneficiary.
- Other types of disputes that may arise involving a charitable trust could include:
- A dispute as to whether the true purpose of the trust serves a charitable purpose that benefits the public as it must.
- Trustee mismanagement of trust assets, such as failing to invest the trust funds with sound business judgment.
- Issues involving federal and state tax laws and how they might apply to the parties involved in a trust.
Other possible disputes could involve the creation of the trust as follows:
- Whether the trustor had legal capacity when they set up the trust initially.
- Whether the trustor was coerced or pressured into forming the trust or was subject to undue influence.
- Whether the trust was created fraudulently, e.g., because the signatures on trust documents were forged.
How Are Charitable Trust Disputes Resolved?
How a dispute involving a charitable trust is resolved depends on the type of trust as well as the nature of the issues and applicable laws. Resolution of disputes may include the following:
- Replacing the trustee;
- Redrafting the trust documents;
- Awarding damages to the beneficiary;
- Addressing any harm done to the trust by a trustee’s breach of fiduciary duties.
As with all disputes, resolution may involve negotiated settlements or legal action in a court of law.
Do I Need the Help of a Lawyer With My Charitable Trust Issue?
You want to have the help of an experienced trust lawyer for any charitable trust issues you may have. Creating a trust can be complicated and technical. You want to ensure that your property is benefiting the charity you want to benefit. In addition, you may have tax objectives, and these should be addressed with the help of a LegalMatch trust lawyer.
A charitable trust attorney can advise you of the types of trusts and help you determine which may best suit your goals.