Using a Charitable Trust to Secure Your Legacy

A charitable trust is a unique trust structure that allows an individual to pass on assets both to heirs and a charitable organization. Using a charitable trust can also offer tax benefits to the estate. 

Here’s what they are and how they work. 

How Charitable Trusts Work

A charitable trust holds assets or cash that generate income for the benefit of beneficiaries or the trust’s donor, that will ultimately go to a charitable organization. Charitable trusts are usually irrevocable, meaning that once established, the donor will no longer have access to the assets in the trust.  

A charitable trust has two prime benefits.

• It allows the donor to protect their legacy and care for loved ones.
• It helps the donor make a significant contribution to a charitable organization.

Depending on the type of charitable trust, donors may see tax benefits in the form of income reduction, lowered capital gains, or estate tax.

What Are the Types of Charitable Trusts?

There are generally two types of charitable trusts, a charitable remainder trust and a charitable lead trust. 

Charitable Remainder Trust 

A charitable remainder trust is also referred to as a “split interest” trust. The assets in this trust usually generate income for the donor or a noncharitable beneficiary, i.e. an heir. Upon the donor’s passing or at the end of the trust period, the remaining asset will be given to the charitable organization. Funded through securities, this type of trust is irrevocable. 

There are two types of charitable remainder trusts:

• Charitable remainder annuity trust (CRAT).  The beneficiaries of this trust are paid a fixed amount each year. The trust can’t accept additional contributions. The amount is determined when the trust is created and can range from 5% to 50% of the initial value of the property or securities. 
• Charitable remainder unitrust (CRUT). The noncharitable beneficiaries receive a consistent percentage based on the value of the assets in the trust. The value is reassessed yearly, so the amount the noncharitable beneficiary receives will likely vary. Unlike a CRAT, a CRUT allows additional contributions to the trust. The payment to the noncharitable beneficiary is 5% to 50% of the fair market value of the assets contained in the trust. The charity will receive the remaining distribution.

Charitable Lead Trust 

A charitable lead trust (CLT) works in reverse of a charitable remainder trust. A charitable lead trust is set up to help a particular organization for a set period, after which any remaining funds will be distributed to the noncharitable beneficiaries. Typically, the charity receives funds first, and then noncharitable beneficiaries are paid second. 

There are two types of charitable lead trusts: 

• Grantor lead charitable trust. This trust allows the grantor (the person funding the trust) to take an immediate tax deduction. The grantor can take a deduction based on the present value of the amount they plan to give the charity. The deduction allowed depends on whether the beneficiary is a private foundation or a public charity. However, the grantor must pay taxes on any income the trust generates. 
• Nongrantor lead charitable trust. The grantor doesn’t own the trust funds in this kind of trust. The trust owns the funds; therefore, the grantor cannot take an immediate tax deduction. However, the trust may take a tax deduction when funds are distributed to the beneficiaries. The trust receives a tax on any investment income earned.

How Do You Set Up a Charitable Trust?

Setting up a trust requires following a step-by-step process, and it’s best to consult a lawyer to ensure you meet all steps to ensure the trust meets legal guidelines. Here are the general steps:

1. Determine the goal of the trust. Consider what causes are important to you and identify a few philanthropic organizations that reflect your interests. 
2. Decide how you will fund the trust. Funding means deciding what assets (cash, stocks, securities, etc.) you want to place in the trust. 
3. Select the beneficiaries. Decide your charitable and noncharitable beneficiaries that will benefit from your trust. 
4. Appoint the trustee. Decide who will be responsible for distributing the assets of your trust. 
5. Draft the documents. It may be best to consult an attorney who can go over the particulars of setting up your trust so that it is valid.
6. Fund the trust. To make your trust official, you will need to move the assets into the trust.
7. Register the trust. Different states have requirements for registering your trust. You can consult with your attorney to register your trust correctly.
8. Complete your tax filing. Charitable trusts require tax filings. An attorney or financial planner can advise you on which forms are necessary.

Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.