This week’s blog is written by guest author, Lyle Solomon, principal attorney with Oak View Law Group.
We all want to be remembered for doing good. If you’ve been fortunate enough to acquire wealth and wish to do something with it beyond leaving it to your beneficiaries, then a charitable trust may be for you. Charitable trusts are irrevocable and are established by the donor for charitable purposes. The ownership of the assets is given to a charity by the donor. The donor can also create a charitable foundation for managing assets like valuables, cash, securities, etc. Not only will you be doing a good deed, but also you’ll get some tax benefits from the IRS!
Charitable trusts can be classified into charitable lead trusts and charitable remainder trusts.
Charitable Remainder Trusts (CRATs and CRUTs)
Charitable remainder trusts are mainly set up to reduce the burden of taxes. The donor donates their assets to the trust. They then set a period for which the trust has to pay the beneficiaries who are not charitable organizations. The period can’t be more than 20 years or the life of the trust’s beneficiaries. The donor can set up the payments to be monthly, quarterly, semi-annually, or annually. After the period is over, whatever remains of the estate goes to the charities included in the trust as beneficiaries.
The types of assets that you can donate to a charitable trust are real estate, cash, stocks, private company stock, and private business interests. Not only does the trustor get tax deductions, but they also receive retirement planning and estate planning benefits as well.
Since charitable remainder trusts are irrevocable, you won’t be able to change or terminate the trust if the charitable organizations who are the beneficiaries of the trust don’t allow you to.
Once you have created the irrevocable trust, you’ve relinquished your ownership of the assets. Charitable remainder trusts will not be counted as part of your estate, and as such, they won’t be included in probate. Estate taxes also won’t apply, and the assets can be transferred to beneficiaries without any delay. This is different from a revocable trust. A revocable trust lets you, the trustor, modify the trust or end it during your lifetime. Revocable trusts undergo probate and are subject to estate taxes.
There are two types of charitable remainder trusts: charitable remainder annuity trusts, also known as (CRATs) and charitable remainder unitrust trusts, also known as (CRUTs)
- Charitable remainder annuity trusts (CRAT) – This trust pays a fixed annuity every year to the charities included in the trust as beneficiaries. The amount paid cannot be less than 5% or greater than 50% of the trust assets, and there is no provision for any other contribution.
- Charitable remainder unitrust trusts (CRUT) – This trust is like a CRAT, but there are a few differences. In case of a CRUT, you can transfer more funds into the trust any time you want. With a CRUT, a fixed percentage will be distributed each year, but the amount will be different each year, as it is calculated on the trust asset balance, which is reevaluated once a year.
Charitable Lead Trust
A charitable lead trust (CLT) is just the opposite of a charitable remainder trust. Unlike charitable remainder trusts, the donor of the trust retains control over the assets of the trust. Any interest accrued, or anything gained, is given to the charity, or they are distributed between the beneficiaries of the donor and the charity. On the expiry of the lead trust, the trust’s ownership is transferred to the beneficiaries or the donor’s heir, whoever the donor has named.
Charitable trusts are for those who have a passion for a cause they want to support after their death. But apart from leaving a charitable legacy, you can also save yourself and your beneficiaries from paying higher taxes with the use of a charitable trust.
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.