A charitable trust can provide advantages for you, your heirs and beneficiaries, and to one or more charitable organizations that you name in the trust. You have options about which kind of trust you want to create, depending on your objectives.
Charitable trusts can come with tax incentives and other financial benefits. A California elder law attorney can review your situation and offer guidance about which type of charitable trust may be the best fit for you. Here are four things to know about a charitable trust:
1. Your Charitable Trust Must Comply with the IRS Rules
Charitable trusts often involve a “split interest” in the trust assets. This means, for example, that a charity may receive the income or a limited percentage from the trust assets for a certain period, with the remaining funds paid to other beneficiaries after that period expires, i.e., a “charitable lead trust.”
Alternatively, you may choose a non-charitable beneficiary or beneficiaries to receive the income or a percentage from the trust for a certain period, such as the lifetime of those beneficiaries or a set number of years, with the charity receiving the remainder of the assets after that period expires, i.e., a “charitable remainder trust.”
Whether you select a charitable lead trust or a charitable remainder trust, your estate planning device must meet all the requirements of the Internal Revenue Service (IRS) to work correctly. A poorly-drafted trust instrument may not provide the intended tax savings.
2. Charitable Trusts Are Irrevocable
Similar to other tax-advantaged trusts, charitable trusts cannot be changed after you create and fund them. You may not be able to substitute a different charitable organization for the original one, even if you no longer agree with the goals or management of that organization. No matter how much it galls you, the trust may have to stand as is.
You could set up a donor-advised fund for your charitable trust to avoid that problem. With this arrangement, you will have some flexibility about which charities receive the assets. You do not have to commit to any specific charitable organization at the time that you create the trust. However, you will only receive tax benefits for gifts to charities approved by the IRS.
Also, the IRS may not care if you suffer a medical or financial crisis and suddenly need to take any of the assets out of the charitable trust. Once assets are retitled into the name of the trust, you cannot change your mind and take them back, unless you or your heirs can persuade a court to modify the trust based on changed circumstances that could not reasonably be foreseen.
3. How Charitable Lead Trusts Work
With this type of charitable trust, you will get a charitable donation tax deduction equal to the amount the charitable trust distributes to the designated charity each year. The charitable lead beneficiary will continue to receive these distributions for a certain period of years. At the end of that period, the trust will distribute the rest of the principal to other non-charitable beneficiaries you select.
4. Charitable Remainder Trusts Can Provide Income During Your Lifetime
A charitable remainder trust pays you or your chosen non-charitable beneficiaries an income from the trust assets for a certain period of years, or for the lifetime of one or more of those beneficiaries. The IRS gives you a tax deduction for the rest of the assets – the charitable remainder – that you designate to go to a charitable organization after your life ends or the time period expires. At that point, the trust will distribute the remainder of the assets to the charitable organization.
These estate planning tools are sophisticated, so be sure to get good advice. A California elder law attorney can help you set up a charitable trust that can meet your needs and goals. Call our office today to schedule a consultation.