If you’re one of the millions of people who make a donation to their favorite charity or non-profit organization each year, you might want to consider setting up a charitable trust to assist with your philanthropy efforts.
Designed as a legal entity for people to support particular causes, a charitable trust allows you to set aside a particular amount of money for charities and gives you the control over managing its distributions. In return for your support, you’ll receive an excellent tax advantage.
Types of Charitable Trusts
There are two main kinds of charitable trusts you can establish: A remainder trust or a lead trust.
With a remainder trust, money and other assets are placed in the structured trust and any beneficiaries will receive a pre-determined amount of monetary support from the trust’s interest gains on an annual basis. Upon the expiration of the trust, the beneficiaries will receive any assets that remain. These assets can be sold by the beneficiaries with no capital gains taxes being levied.
In a lead trust, the assets that remain at the end of the trust’s terms do not have to be awarded to the original beneficiaries of the trust. In most cases, the trust expires and the assets are given to the original grantor’s family members.
When setting up a charitable trust, it is important that you understand these key differences so that your assets are distributed based on your wishes, and that doesn’t change over time.
Benefits of Setting Up a Charitable Trust
Aside from the standard benefits of a tax deduction, charitable trusts afford the following benefits:
- The assets in a charitable trust aren’t part of the grantor’s taxable estate so upon death of the grantor, these assets won’t be subject to estate taxes
- Appreciated assets aren’t subject to capital gains taxes
- There are certain income tax deductions that can be taken as a result of the present value of the remaining interest that will inevitably be rewarded to the beneficiaries
Setting up a Charitable Trust
After consulting with your lawyer to determine that a charitable trust makes sense for you, simply follow these four easy steps to establish one:
- Calculate the sum of money/assets you’re able (and willing!) to put into the trust—remember that they cannot be removed once they become part of the trust
- Determine beneficiaries and the logistics of how distributions will work
- Have all documents drawn up professionally and signed in your presence
- Decide how you’d like to invest the money that’s in the trust
What other tips do you have for establishing a charitable trust?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
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