Pooled Charitable Trusts and Tax Breaks

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 What is a Trust?

A trust is a legal device that permits the owner of property to transfer that property to a beneficiary. This is done through the use of a third party, called a trustee. The trustee is responsible for managing the property in the trust on behalf of the beneficiary or beneficiaries.

A trust is typically an efficient way for an individual to transfer their assets in a manner in which they can control and manage. An example of this control would include if the property owner places specific conditions on the trust property which must be met prior to the trustee transferring their property to the beneficiary.

What is a Charitable Trust?

A charitable trust is a type of trust that is created for a charity. In order to be a valid charitable trust, the trust must have the general purpose of benefiting the public good.

A charitable trust is a type of trust that is set up for a charitable purpose. This may include purposes such as education, medical research, and poverty. For example, an individual could place funds into a trust to benefit a certain charity or organization of their choosing.

For the purpose these trusts, charitable purposes includes:

  • Giving to the poor, including homeless shelters and food banks;
  • Advancing education and knowledge, including scholarships;
  • Church or religious purposes, including leaving a trust for a church or religious organization;
  • Promoting health, including health clinics; and
  • Advancing public government interests, including parks and museums.

The beneficiaries in the trust must be indefinite in order for the charitable trust to be valid. The trust must not benefit only a few specific individuals.

In other words, the beneficiaries of the charitable trust cannot be individuals, but, instead, must be an organization or group. The charity acts as the trustee of the trust and oversees the funds while monitoring the distributions to the recipients.

In order to qualify, the charity will have to be recognized by the Internal Revenue Service (IRS) and be tax-exempt. The charity decides how to invest the individual’s assets and will issue the individual or their designated beneficiaries income that is generated.

Many individuals establish charitable trusts so they can receive tax breaks. For example, the individual and their beneficiaries may be able to receive tax breaks for income tax, estate tax, and capital gains tax.

It is important to note that a charitable trust typically requires a minimum investment of $100,000. It may be tough for many individuals to come up with this amount of money on their own.

What is a Pooled Charitable Trust?

Another option is available if an individual wishes to set up a charitable trust but is only able to invest a smaller amount of money. This option is called a pooled charitable trust.

A pooled charitable trust allows multiple individuals to pool their money together in order to come up with the threshold donation amount. The majority of trusts will permit donations as small as $5,000 or $10,000.

A pooled charitable trust donation is an excellent way to generate extra income. It may also assist with future plans such as providing for a child’s education or making extra money for retirement.

It is important to be informed about the risks before investing in a pooled charitable trust. An individual should research the charity or organization that they wish to invest with prior to making any investments. It may also be helpful to discuss the possibility of investing with an attorney.

How is a Pooled Charitable Trust Created?

As discussed above, there are many benefits to creating a pooled charitable trust. The key steps for creating a pooled charitable trust include:

  • Choose an organization or charity that is recognized by the IRS and has tax-exempt status;
    Provide the charity or organization with an investment. This is generally in the form of cash or securities;
  • The charity or organization that is chosen will then set up the pooled charitable trust after enough individuals contribute their money so that the overall threshold donation amount is met;
  • The charity or organization then decides how to invest the money. The individual who donated will not have a say in how the donation is invested. It is important to be aware of the risk that the investment could not do as well as projected;
  • Once the investment generates a return, each member of the pool will get income paid to them; and
  • In the years following the initial investment, the individual can choose whether they want to make additional donations to the pooled trust. This is typically done in increments of $1,000 or more.

What Tax Breaks are Available for Pooled Charitable Trusts?

An individual can receive tax breaks for participating in a pooled charitable trust. The benefits include a deduction for income tax.

The tax deduction will reduce the amount of income that the individual is taxed on, which will, in turn, decrease the amount of money that the individual owes on taxes each year. It is important to note that the income tax deduction for participating in a pooled charitable trust will not be for the entire amount that is donated because the individual is still receiving income payments after the trust gets a return on the investment.

The income that is received will be taxed as the individual’s personal income, just as with their regular earned wages. Instead, the amount that an individual can deduct for the donation alone will depend on several factors. These include the life expectancy of the beneficiary and how much money the trust is generating from the investment. These issues may be tricky, so it is advisable to consult a tax attorney or a local estate attorney when determining the possible available income tax deduction.

After donating property or securities to a pooled charitable trust, an individual should educate themselves regarding the potential for a capital gains exemption. An individual may be able to avoid paying capital gains tax on their donation if they owned it for 1 year prior to the donation and it increased in value.

If this occurs, the individual will gain more overall from the trust. This is important to consider when the individual is deciding what property or security to donate to the pooled charitable trust.

What Happens if the Charitable Purpose Fails?

In some cases, a charity may shut down or the charitable purpose of the charity may become impossible to follow because of an unforeseen event. If the creator of the trust intended for the trust to go to a specific charity but that charity no longer exists, the trust may still continue.

In these cases, the court may use the Cy Pres doctrine. Pursuant to this doctrine, the court will choose a different charity that is as near as possible to the creator’s charitable intent.

For example, suppose the trust creator specified that a school would benefit from the trust but that school closed after the trust creator died. The court may choose a school that is similar to the school that was originally specified.

Do I Need to Hire an Attorney to Set Up a Pooled Charitable Trust?

It is essential to have the assistance of an experienced estate attorney when setting up a pooled charitable trust. An attorney can help you determine what charity to donate to, how much you can donate, and what the projected return on investment may be.

In addition, your attorney can explain what potential tax breaks you can receive. Having an attorney’s help can ensure that you make the best choices for your investment, your financial situation, and your long term goals.

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