What Are Charitable Trusts?

Charitable trusts allow you give generously while retaining some income for yourself.

A charitable trust is an estate planning option designed to help your favorite charity while creating tax benefits for you and your heirs. Establishing a charitable trust generally requires a substantial gift for the charity and, including attorney's fees, may require an initial investment of more than $100,000. Once the trust is established, it is irrevocable. You may not change your mind about the gift or reclaim ownership of the donated cash or property.

Establishing the Trust

The most common type of charitable trust is called a charitable remainder trust. You identify a charity approved by the Internal Revenue Service to be the recipient of your gift. Next, create a trust document describing the terms of the trust, including who will receive trust income, how income will be paid and for how long. You transfer ownership of your donation to the trust and the charity acts as the trustee with a duty to invest, protect and manage the trust's funds.

Tax Advantages

Charitable trusts offer several tax advantages. You may claim an income tax deduction, spread over five years, for the net value of your gift. The net value is calculated by reducing the value of the gift by the amount of income that you expect to receive. You do not pay capital gains tax on the profits of an investment --- for example, real estate or stocks --- when the property is donated to a charitable trust. The donated property is not part of your estate when you die and, therefore, not subject to estate taxes.

Income Options

You may collect income from the trust through fixed annuity payments or payments based on the trust's current value. The amount of a fixed annuity is set when the trust is established and cannot be changed later. Alternatively, the trust may set up annual payments that are a percentage of the trust's value. The Internal Revenue Service requires the trust to pay at least 5 percent of trust value each year. This option provides adjustments for market conditions like inflation.

Pooled Charitable Trust

Some charities sponsor pooled charitable trusts that give individuals the advantages of a charitable remainder trust without requiring a prohibitively large initial donation. The charity itself is responsible for establishing the trust, so you have no legal fees. You may donate cash, stocks or bonds, but not tangible property, to a pooled charitable trust. Your donations may be made over time, and you may postpone taking income payments to a time of your choosing, including your retirement.

References

• FindLaw: Tax Incentives for a Charitable Remainder Trust
• FindLaw: Pooled Charitable Trusts