Introduction to Charitable Trusts

Charitable trusts are typically established to distribute assets to charity and can also offer income or estate tax savings. These types of trusts are irrevocable, which means they cannot be easily modified or changed. A trustee manages the assets within a charitable trust according to the trust agreement.

The following are the most common types of charitable trusts to consider for your estate plan:

1. A charitable lead trust provides an income stream to charity for a set period, and then any remaining assets are distributed to named beneficiaries. The income stream can be set up as an annuity or unitrust amount. The annuity allows for a fixed income stream, whereas the unitrust fluctuates each year depending on the fair market value of the assets in the trust. A charitable lead trust is not tax-exempt. The responsible party for the income tax liability depends on whether the trust has a grantor or non-grantor structure. If it’s a grantor trust, the income will be taxed on the grantor’s individual income tax return. If it’s a non-grantor trust, the income is taxed at the trust level; but, this type of trust is also eligible to take a charitable deduction each year for the amount distributed to charity.

2. Charitable remainder trusts function the opposite way of charitable lead trusts; the income stream is first provided to the named beneficiaries for a set period of time, and the remainder is given to charity. The income stream can again be set up as an annuity or unitrust amount. Unlike charitable lead trusts, charitable remainder trusts are tax-exempt. If the trust is funded during life, then the grantor gets a charitable deduction on their individual income tax return. If the trust is funded at death, then there is an estate tax deduction available for the grantor’s estate.

3. A third type of charitable trust is a private foundation, an organization that supports charitable purposes by relying on private donations rather than public fundraising. Private foundations can be set up as trusts or can be incorporated. Choosing to set up a private foundation as a trust eliminates the corporate filing obligations, but may limit some flexibility. Charitable donations made to a private foundation can be claimed on your individual income tax return, with certain limits applied.

4. A pooled income fund is a type of trust established and operated by a qualified nonprofit organization. Assets are pooled with other donors’ assets, and the assets are managed by the nonprofit. The grantor or other named beneficiaries typically receive an income stream during life, and upon the grantor’s death the assets are distributed to charity.

The decision of whether to use charitable trusts in your estate plan depends on what your charitable and estate tax goals are, and what types of assets with which you are looking to fund the trust. There are many rules and regulations related to these types of trusts, and numerous ways to structure them. It’s important to involve your various trusted advisors in the process to successfully achieve your goals. Learn more by contacting a Boulay advisor at 952.893.9320 or learnmore@boulaygroup.com and asking about our estate and trust planning services.