Charitable trust
Summary
A charitable trust is a type of trust that gives some of its assets to groups that the IRS defines as charitable organizations. This article describes the two main kinds of charitable trusts and then explains how they lower taxes and fees.
What is a charitable trust?
A charitable trust is a type of trust that gives some of its assets to groups that the IRS defines as charitable organizations. These can include educational, scientific, political, and religious groups. Some of the assets can also go to other beneficiaries, such as the person who set up the trust and their family members.
People usually set up a charitable trust to create cash flow for themselves and their family, lower taxes, and avoid probate fees while also supporting causes that they believe in. All charitable trusts are irrevocable trusts, meaning that they generally can’t be changed or terminated.
What are the main kinds of charitable trusts?
There are two main kinds of charitable trusts: charitable lead trusts and charitable remainder trusts. The main difference between the two is whether the charity receives income from the trust before or after the other beneficiaries.
Charitable lead trusts
With a charitable lead trust, the income that the trust makes (through interest on the principal amount, sale of assets, dividends on investments, and so on) is given to the charity for a certain number of years. After those years are up, the assets go to other beneficiaries, such as family members.
Charitable remainder trusts
With a charitable remainder trust, the income is given out in reverse order from a charitable lead trust. First the income goes to the named beneficiaries (other than the charity), for a certain number of years. Then what remains is given to the charity.
Beneficiaries of a charitable remainder trust can receive either a fixed amount every year or a certain percentage of the amount that the trust is worth every year, depending on how the trust is set up.
How do charitable trusts lower taxes and fees?
Like all trusts, a charitable trust owns assets given to it by the person who sets up the trust. A person chosen to be the trustee manages the assets according to the terms of the trust.
Since the person who set up the trust (called the trustor, grantor, or settlor) no longer technically owns them, the assets are not part of the person’s estate upon their death, and the person’s estate does not need to pay federal or state estate taxes on them. These non-estate assets are also not part of the probate process, so they are not counted when probate fees are calculated.
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