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What is a Charitable Trust?

by Caldwell Trust

Charitable giving is a great way to support a specific cause or organization and it can be important for financial planning, estate, and tax purposes, you just have to know how to make the most of your contribution.

What is a Charitable Trust?

A charitable trust is a non-tax-exempt trust established where the money is put toward one or more charitable purposes. Essentially, this type of trust will let your assets benefit your family, your beneficiaries, and a chosen charity.

Types of Charitable Trusts

1. Charitable Remainder Trust (CRT)

The charitable remainder trust allows donors to give contributions, of potentially highly appreciated assets, while saving on estate taxes. Payments from a CRT go to the beneficiaries first and the remaining to the charitable organization(s). CRTs are popular with people who would pay more capital gains tax bills.  The highly appreciated asset is sold once it is transferred to the trust paying no capital gains tax.  

With a CRT, you can put your assets in the trust and continue to get income from it. You get the income through percentage payments or annuity payments. 

Once the trust reaches the end of its term, the assets are given to the donor's charity of choice. Here are some benefits of CRTs.

  • Lower estate taxes
  • Final donation to the charity
  • Reduced capital gain taxes
  • Continued income from the asset
  • Immediate charitable income tax deduction 

2. Charitable Lead Trust (CLT)

Charitable lead trusts (CLT) are the opposite from a Charitable Remainder Trust.  CLTs provide income payments to the qualified charitable organization(s) of your choice for a period of years, after which, the trust assets are distributed to non-charitable beneficiaries, such as family members.  The CLT provides donations but allows the donor's family to have tax-free gifts. It is an excellent giving strategy when you don't want to set an amount of additional income.

Families don't get the annual gift exclusion rates and a CLT does not allow writing donations for your taxes. 

If you meet the requirements, you'll qualify for a deduction but only in the year when the trust was created. Make sure you ask your lawyer if there are any deductions. Some benefits of CLT include:

  • Removal limits on the annual gift exclusion
  • Reliable income stream to the charity
  • Left-over assets are tax-free

3. Private Foundation

Private foundations are recognized for charitable donations. It offers more control and flexibility over the donated assets. The private foundation can exist forever and does not end at the donor's death. The private foundation is suitable for people with specific ideas how their assets should be used.  A private foundation is effective when you want to maintain the maximum amount of control over your charitable giving while teaching younger generations about the importance of charitable giving and promoting a family legacy.  The activities the private trust offers are:

  • Scholarships
  • Grants
  • Charitable programs
  • Direct charitable activities
  • International grants

Here are the benefits of private foundations.

  • Consistency
  • Direct philanthropy
  • Sheltered income
  • Expanded charity opportunities
  • Double capital gains tax benefits

4. Pooled-Income Fund

If you want to give smaller portions to charity while generating income, then a pooled income fund is an excellent choice. You can pool together securities to create a large amount that you can later give to charity. The money is paid to you and the beneficiaries. The remainder of the income fund is donated to charity upon the death of the donor. Most of the pooled income trusts only accept mutual funds stocks and cash. Here are the benefits of a pooled income trust.

  • Limitation of federal estate taxes
  • Immediate income-tax deductions
  • No probate on the remaining balance of the estate

If you are looking for a charitable giving plan, make sure you consider the tax and financial implications. You can discuss the options with an estate planning professional to find the best option for charitable giving. contact us today to get started with charity giving and get more from your estate.

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