Two Types of Charitable Trusts
A charitable trust refers to a type of trust created to benefit three specific parties: yourself, your beneficiaries, and a charity of your choosing. Irrevocable upon creation, a charitable trust operates by selling the assets within the trust and distributing them based on the terms created by the trust.
While the inner workings of a charitable trust can be complex due to the potentially large number of parties named in the trust, many people in the U.S. favor them as a method to leave some or all of their estate to a specific charity and for tax benefits.
There are two kinds of charitable trusts:
1. Charitable Lead Trusts
As the name suggests, this type of charitable trust operates by addressing the named charity first before moving on to the other beneficiaries. This trust sends the proceeds to the charity first, allowing the owner to benefit from a matching charitable donation tax deduction. The charity gets the funds first, the owner gets an equal tax deduction, and the other beneficiaries get the remainder of the principal.
It’s helpful to think of this trust as a “charity first” design. So if you have a charitable lead trust that includes your family, your friends, and the World Wildlife Fund as the beneficiaries, you’ll know the World Wildlife Fund will always be paid first and your family and friends will get the rest.
2. Charitable Remainder Trusts (CRTs)
Also called CRTs, this charitable trust works the opposite of a lead trust. The owner of this trust has elected to get the income from the asset distribution before sending any assets to the charity.
Basically, everything works in the opposite direction of a charitable lead trust: the charity still gets paid, the owner still gets a tax deduction, but the owner gets paid first. The owner’s tax deduction will still match the funds provided to the charity, but it reflects the amount provided to the charity at the end of the term.
Regardless of which trust you want to set up, a few key strategies should be considered during the trust’s creation. While the trusts become irrecoverable once activated, setting up a donor-advised fund provides a loophole to reconsider the selected charity or to add new charities. The donor-advised fund still sends the funds to the charities but allows the owner to consider new information about the charity as time goes on.
The owner can also replace assets named in the trust for beneficiaries. So if you want to leave some form of inheritance to the beneficiaries, you could take out a life insurance policy on yourself and pay for the policy premiums using the income created by the trust. This would allow you to set aside funds for the beneficiaries without sacrificing the funds intended for the charitable organizations.
For questions on charitable trusts, contact Naples Charitable Trust Attorney Jim Nici at (239) 449-6150 today. Let us use our experience and expertise to help you set up your charitable trust.