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All About the Basics of Charitable Trusts

As of Jan. 2019, an alarming 78% of American workers were living paycheck to paycheck. If you’re lucky enough to have wealth, you should take every possible precaution to ensure your assets go into the right hands after your death or incapacitation. Here, we explain the basics of charitable trusts, including:

  • What charitable trusts are
  • The two different types of charitable trusts
  • The benefits of charitable trusts

What Are Charitable Trusts?

Trusts are free-standing legal entities that people use to protect and transfer assets, including real estate, securities, and cash. Trusts come in many varieties, including charitable trusts.

Charitable trusts are non-tax-exempt trusts that are typically assigned to two or more charitable purposes. Further, charitable trusts allow for at least one charitable contribution deduction on your tax return.

These trusts are treated as private foundations. Even though charitable trusts can sometimes meet public charity guidelines, they can never attain exemption from excise taxes on investment income.

Different Types of Charitable Trusts

Charitable trusts come in two main varieties: charitable lead trusts and charitable remainder trusts.

Charitable Remainder Trusts

Charitable remainder trusts (CRT) are irrevocable trusts, meaning they can’t be modified or terminated without permission from the beneficiaries, that give income to noncharitable beneficiaries for a set number of years or their entire lifetimes. After this income dispersion period has elapsed, the rest of these trusts’ assets are donated to a charity.

With help from your estate planning lawyer, you can set up annual payments to noncharitable that range anywhere from 5% to 50% of the trust’s total assets. If you choose to disperse income to noncharitable beneficiaries for less than a lifetime, you must select an initial period no greater than 20 years.

Charitable remainder trusts can give you better tax benefits than charitable lead trusts. They’re also good for people with assets that have a low-cost basis. For clarity’s sake, assets with a low basis are stocks or real estate, for example, that are currently worth less than when they were gifted to you. CRTs let you sell these assets without paying capital gains taxes.

Charitable Lead Trusts

Put simply, charitable lead trusts are the opposite of charitable remainder trusts. They disperse income to a charity for a set number of years, then give the rest of their assets to noncharitable beneficiaries at the end of term or upon your death.

We usually recommend charitable lead trusts for people who have substantial wealth, especially when their assets will appreciate heavily in the future.

What Are the Benefits of Charitable Trusts?

The main benefit of charitable trusts is the ability to split your wealth between family members or loved ones and charitable causes. You won’t pay any federal taxes whenever you donate property to charities, either. Charitable trusts also offer other tax benefits.

Charitable trusts manage themselves, helping you avoid ongoing legal or court fees. This trait offers a hands-off experience, relieving beneficiaries from the responsibility of making important decisions.

Interested in Setting Up a Charitable Trust? Consider Getting Legal Help

Although you can do estate planning without an estate planning lawyer, there’s no sense in taking unnecessary risks with your family’s nest egg. Even if you’re a trained attorney or an experienced accountant, you should always seek out at least one second opinion regarding your estate planning needs. If you’re on the market for high-end estate planning services, look no further than The Knee Law Firm.

Led by Robert A. Knee and Peggy Sheahan Knee, our two leading attorneys are regionally renowned for their proven excellence in estate planning. Robert A. Knee, a member of the Elder Law and Fiduciary Litigation Committees of the American College of Trust and Estate Counsel (ACTEC), won the Arthur S. Horn Distinguished Service Award for Real Estate in Jan. 2017. Peggy Sheahan Knee, who also serves on the two aforementioned ACTEC committees, is a former president of the New Jersey State Bar Association.

We’re always interested in helping more families arrange their estates. If you’re interested, call our Hackensack office at (201) 996-1200.

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