Charitable Trusts

What does a charitable trust do?
A charitable trust helps to reduce estate and other taxes.  Certain assets carry a heavy capital gains tax or income tax burden.  They cannot be liquidated without paying a large portion of the proceeds to the government.  A charitable trust may allow these assets to be liquidated and placed in trust, without paying the tax.  It may also generate charitable deductions to shelter other income.


What is a charitable remainder trust (CRT)?
A Charitable Remainder Trust (CRT) holds assets in trust for the lives of the beneficiaries, paying income on the corpus to the beneficiaries.  At the end of a specified period, or on death of the beneficiaries, a charity receives the corpus.  Because the gross value of the assets generates income for many years, the CRT gives you more money back than you would receive by liquidating the assets and then investing the proceeds.  The large charitable deduction on the donor’s Form 1040 when the trust is established also results in tax savings that may be invested to generate even more return on investment.


What is a charitable lead trust (CLT)?
A Charitable Lead Trust (CLT) holds assets in trust for a period of time, often the life of the grantor, paying income on the corpus to a charity.  At the end of the period, the corpus is given to specified trust beneficiaries.  If you want to benefit your descendants, but do not need the income from the assets, this type of trust is very useful.  The Charitable Lead Trust shelters current income, saving income tax.  At the end of the trust period, the corpus is received by the beneficiaries, free of estate or other tax.


How does a charitable remainder trust work?
Assume that you have a $750,000 parcel of vacant land with a very low tax basis.  You want to sell it and invest the funds to generate a steady income.  If you sold the land, you would incur capital gains tax of over $100,000, leaving you with less than $650,000 of principal to generate income.  Establishing a charitable remainder trust would spawn a large charitable deduction.  It would also produce a higher income stream because the entire $750,000 would remain as principal.  Apart from the satisfaction of giving a large sum to a worthy cause, it makes financial sense to establish the trust.  The $25,000 or more saved due to the charitable tax deduction can also be invested for additional yield.


Are there other benefits to having a a trust hold property to be distributed after you die?
Yes.  If you name an individual as beneficiary of an insurance policy or of your will, and that person is incapacitated when you die, the court will probably take control of the proceeds. That is because most benefits to be paid to an incompetent person are subject to court supervision.  But if the assets are in trust, and the trust instructs the trustee to do so, the trustee can use the proceeds to provide for this person, without court interference.

You can also create a more complex plan to benefit your family in a trust than you can in a will.  If you have a large number of beneficiaries and you want each to have a customized plan, using a trust makes sense.  For example, if you want your son to receive distributions only if he maintains sobriety, marries, wears a pony tail, or becomes a plumber, such conditions can be included in a trust.  A court might refuse to enforce such limitations.


Who can be beneficiaries of the trust?
You can name any person or organization you wish, but most people name their children and/or spouse.


Can I make any changes to the trust?
A Charitable Trust is generally irrevocable, so you cannot make changes after the Trust has been set up. Read yours carefully and be sure it is exactly what you want before you sign.


When should I set up a charitable trust?
You can set one up any time, but because the Trust is irrevocable, many people wait until they are in their 50s or 60s. By then, family relationships have usually settled - and you know whom you want to include as a beneficiary.

Should I seek professional assistance?
If you think a charitable trust would be of value to you and your family, talk with a competent estate planning attorney. If you are not sure whether the attorney with whom you are talking has the background you need, do not be afraid to ask about the attorney's training and professional affiliations. A well-qualified estate planning attorney should have a tax or accounting degree or at least 15 years of experience drafting wills and trusts. The attorney should also have appropriate professional affiliations. These could include active involvement in ABA or state bar sections related to estate planning. They could also include membership in the National Association of Elder Law Attorneys and other professional groups concerned with estate planning. A well-qualified attorney will be happy to explain his credentials.


© John B. Payne, 2013

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