What is a charitable trust?

A charitable trust allows you to donate assets to a chosen tax-exempt charitable organization or nonprofit and comes with certain tax benefits to help you minimize what you might owe to the government. Charitable trusts can also be structured to provide a reliable income stream to you and your beneficiaries for a set period of time.

Establishing a charitable trust can be an important part of your estate plan and a rewarding way to make an impact for a cause you care deeply about.

Types of charitable trusts

There are a few types of charitable trusts to consider based on your situation and what you may be looking to accomplish.

Charitable lead trust

A charitable lead trust is an irrevocable trust that is established to distribute an income stream to a designated charity or nonprofit organization for a set number of years. The trust can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes and current year income tax deductions when the assets are donated to the trust.

If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 30 percent of their adjusted gross income (AGI) in any single year. Any unused deductions can generally be carried over into the subsequent five tax years. The deduction limit for appreciated securities or other assets is also generally limited to no more than 30 percent of AGI in the year of the donation.

Upon the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs or designated beneficiaries. The assets do not revert to the charity.

There are two types of charitable lead trusts.

Charitable remainder trust

A charitable remainder trust (CRT) works a bit differently than a charitable lead trust. A CRT is an irrevocable trust that is funded with cash or securities. The CRT provides the donor or other beneficiaries with a stream of income with the remaining assets in the trust reverting to the charity upon your death or the expiration of the trust period.

There are two types of CRTs.

How to set up a charitable trust

Establishing a CRT requires several steps.

1. Choose a charity or charities to support with a CRT. 
2. Identify the assets you want to transfer into your trust.
3. Create the trust with the help of an attorney.
4. Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets such as real estate to the trust. 
5. Receive an income stream for you or your stated beneficiaries based on how the trust is set up.
6. The remaining trust assets revert to the designated charity or charities after a designated time, or after the death of the last remaining income beneficiary.

Benefits of a charitable trust

There are several benefits of a charitable trust that make them attractive for estate planning and other purposes.

• A charitable trust is a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to both the charity and the donor.
• The trust provides upfront income tax benefits to the donor when the contribution to the trust is made.
• Donating highly appreciated assets, such as stocks, ETFs and mutual funds, to the charitable trust can help you avoid paying capital gains taxes that would be due if these assets were sold outright. Additionally, the market value of the assets donated is used to determine the value of the donation when calculating the amount that can be deducted for tax purposes.
• A charitable trust can provide income to the donor or their heirs, and in the case of a charitable lead trust, the remaining balance in the trust reverts to the donor or their heirs at the end of a set period of time.
• Donations to a charitable trust can help reduce the value of your estate and reduce estate taxes on larger estates.

Disadvantages of a charitable trust

For all their benefits, charitable trusts do have some disadvantages as well.

• These trusts are generally irrevocable, meaning that you cannot undo the trust if your situation changes and you were to need the money or assets donated to the trust. Once you make the decision to establish and fund the trust, the money is no longer under your control, and the trust cannot be revoked.
• Any income you derive from the trust could reduce the amount that ultimately goes to the charity or nonprofit organization. If your goal is to give the maximum amount directly to the charity upfront, a charitable trust might not be the best vehicle to accomplish this.
• You need to make a large enough contribution to the trust to accomplish the dual goals of providing a significant donation to the charity and providing income to yourself and your heirs.

Is a charitable trust right for you?

A charitable trust may be right for you if:

• You have wealth you want to share with a charity or charities you care about.
• You own assets that have appreciated substantially in value over time and you’re looking to minimize your capital gains taxes.
• You want to make charitable donations over a long period of time while generating income for yourself and your beneficiaries.

Who should not choose a charitable trust?

A charitable trust may not be right for you if:

• You prefer to maintain control over your assets.
• You have a more modest estate and limited assets to donate.
• You’re not sure which charity or charities you want to commit to supporting on a long-term basis.
• You don’t want to put in the time to set up a trust and oversee that trust.
• You don’t want to bear the cost of setting up a charitable trust, in which case a donor-advised fund or a pooled income fund may be a better alternative.

It’s best to consult with a tax expert and financial advisor if you are thinking about establishing a charitable trust or other tax-efficient ways of making donations to nonprofit organizations.

FAQs

• What is the purpose of a charitable trust?

  The purpose of a charitable trust is to support a charity or charities while enjoying tax benefits and generating income for your family.

• Can you make money from a charitable trust?

  If the assets in a charitable trust gain value, the trust can generate an income stream for you.

• How much does a charitable trust cost?

  The cost of setting up a charitable trust can range from a few thousand dollars to many thousands of dollars, depending on the complexity involved. There are also ongoing administrative costs associated with a charitable trust.

• What is the difference between charitable trusts vs. foundations?

  Both charitable trusts and foundations can support causes that are meaningful to you, but they differ in how they’re structured and managed. A foundation is a nonprofit organization that’s managed by a board of directors, and it needs to be publicly filed. A charitable trust does not have to be filed publicly and is managed by a trustee or trustees.

Bottom line

A charitable trust could be a tax-efficient way to donate assets to charities you support over time while generating income for your family. Since charitable trusts come with benefits and disadvantages, it’s important to understand the nuances involved with the help of an attorney before moving forward. 

— Maurie Backman contributed to an update.