Are you looking to make a meaningful gift supporting a cause you care about, while maximizing your tax benefits? Estate planning with a charitable trust can offer a unique opportunity to do just that. This approach allows you to donate assets, reduce your taxable income and potentially enjoy some advantages during your lifetime. Here’s a look at how charitable trusts work, the types of charitable trusts available and what to consider when setting one up.
What Is a Charitable Trust?
A charitable trust is a unique legal arrangement in which you place certain assets—like cash, property, or securities—into a trust that will eventually benefit a charitable organization. The benefit of using a charitable trust lies in its tax advantages and the ability to retain some control or use of the asset during your lifetime.
Establishing a charitable trust is considered an irrevocable gift, meaning the assets in the trust will eventually go to the chosen charity. This can offer an immediate tax deduction, since it reduces the size of your estate and, in turn, the amount of estate taxes your heirs may owe later.
What are the Types of Charitable Trusts?
Charitable trusts come in several forms, each serving different needs and goals. Here are two standard options:
Inter Vivos Charitable Remainder Trust
This type of trust, often called lifetime trust, is established while you live. You transfer assets into the trust — cash, stocks, or even real estate — and name a trustee to manage it. You or a designated loved one will continue to receive income from these assets for the rest of your life.
After your passing, the remainder of the trust goes directly to the charity of your choice.
For example, consider a donor who wants to support a university but also needs a steady income. By placing assets in an Inter Vivos Charitable Remainder Trust, the donor can receive regular payments during their lifetime while ensuring that the university will benefit from the remaining assets.
This arrangement may also lower income taxes now, as a portion of the trust is irrevocably earmarked for a charitable cause.
Charitable Residual Interest Trust
If you’d like to gift something you still want to enjoy personally, such as real estate or valuable art, a Charitable Residual Interest Trust might be a good fit. With this type of trust, you maintain possession of the property for as long as you live. However, you agree to pass it on to the charity upon death.
Take the example of someone who owns a beloved home. By creating a Charitable Residual Interest Trust, the homeowner can stay in their home for life, while knowing that it will benefit a worthy cause afterward. As an added benefit, there are typically no capital gains taxes on the appreciated property when it transfers, offering a significant tax saving for the donor.
How Do Charitable Trusts Maximize Tax Benefits?
One of the main advantages of a charitable trust is the immediate tax deduction based on the market value of the donated assets, which can provide significant income tax savings now. Since the assets placed in a charitable trust are not counted as part of your estate, they’re not subject to probate. Probate is the legal process that validates a will and can sometimes delay asset distribution to heirs, making a charitable trust an appealing way to bypass this process.
Charitable trusts are particularly effective for more significant donations and often require professional management. The donor can benefit from the reduced taxable income, and the charitable organization eventually benefits from the assets, making it a mutually beneficial arrangement.
How Do I Know if a Charitable Trust Is Right for Me?
Estate planning with charitable trusts generally works well for individuals with sizable estates or significant assets who want to make a lasting impact. If you have appreciated assets, such as real estate, stocks, or valuable collectibles, a charitable trust can help you avoid capital gains taxes, while still retaining some control or enjoyment over the assets.
Consider, for instance, an individual who wishes to donate their art collection to a charity but still wants to enjoy it. By placing the art in a charitable trust, they retain the collection while securing future support for the charity. When thoughtfully planned, charitable trusts offer flexibility and support in managing your charitable contributions, while maximizing financial benefits.
How Can I Set Up a Charitable Trust?
According to the University of Calgary, setting up a charitable trust involves several essential steps, including choosing the type of trust, determining the assets to place in it and selecting the charitable organization that will benefit.
Many charities, like universities and non-profit foundations, have teams or advisors to help you establish a charitable trust that aligns with your goals. Working with an estate planning attorney can also make the process smoother, since they can provide guidance tailored to your unique situation and financial objectives.
Ready to Create a Plan That Gives Back?
If you’re considering estate planning with a charitable trust and want to explore how it could benefit you and the causes you care about, we’re here to help. Contact our team today to schedule a consultation and create a charitable plan that reflects your values and goals. Together, we’ll ensure that your legacy makes a meaningful impact.
Key Takeaways
- Maximize tax benefits: Charitable trusts provide immediate tax deductions based on the market value of donated assets, lowering income taxes.
- Avoid probate: Assets in charitable trusts are not included in the estate’s value, helping to streamline inheritance and avoid probate.
- Keep enjoying your assets: Options like the Charitable Residual Interest Trust allow you to retain enjoyment of assets, like real estate or art, for life.
- Provide lasting impact: Charitable trusts create a legacy by directing assets to organizations you care about, supporting causes long after your lifetime.
- Plan with flexibility: Different charitable trusts offer flexible solutions to meet your financial goals, while supporting your chosen charity.
Reference: University of Calgary “Charitable Trusts”
