When you hear about charitable trusts, you might initially think this tool is about donating to a charitable organization with no returns. But there is more to a charitable trust than you think. A trustor can still benefit, directly or indirectly, from a charitable trust.
One of the types of charitable trusts is the charitable remainder trust (CRT). With this type, the trustor transfers their assets to the trust and the trustee will manage the trust in a way that generates revenue. This includes selling and reinvesting assets. When the trustor dies or the set period ceases, whichever comes first, the charitable organization receives the remaining assets.
The other kind is charitable lead trust (CLT). With this type of trust, the donor sets an amount and period of donation to the charitable organization before distributing the remaining assets to beneficiaries.
With both types, the contributions may come from the assets or prospective dividends in form of cash or securities.
Benefits of this trust
When considering estate planning tools such as trusts, the estate owner usually explores first the benefits to see if they align with their goals and priorities. Some benefits of charitable trusts are as follows:
- Income source: CRTs are meant to generate income for the trustor and their beneficiaries during the trust’s existence. In the case of CLTs, any remaining balance after the donation period ends will return to the trustor or their heirs.
- Tax benefits: Unlike if it were sold directly, the sale of assets in trusts can avoid capital gain taxes. Moreover, the estate taxes on assets in a charitable trust can be subject to reduction.
Both the trustor, if still alive, and their beneficiaries can benefit from the trust.
A charitable trust is inflexible and the trustor can no longer revoke it. Therefore, the trustor must think of the terms very carefully, including the appointed trustees, beneficiaries and amounts and periods of donations.
Whether it is generating income or minimizing tax liabilities, an individual’s goals will determine whether a charitable trust is a good tool to include in their estate plan.