How do you give to charity?
Do you sign up for direct debits, or give cash when asked? Maybe you open up your checkbook a few times a year to give generously to causes close to your heart.
If you give to charity on a regular basis, you might be surprised to learn that your giving could be more effective. A change in the delivery of your donation could send your contributions soaring. You might even continue earning money from your assets and save on taxes at the same time.
Charitable trusts aren’t just for multi-millionaires and billionaires. Planned giving vehicles give anyone with a philanthropic heart, opportunities to make a real difference.
Think your donations wouldn’t be better served by a charitable trust? Think again. Keep reading to see if one of these different types of charitable trusts can maximize your donation.
Charitable Remainder Trust (CRT)
A charitable remainder trust (CRT) provides a mechanism for donors to leave more money to charity and spend less on estate taxes.
CRTs are particularly popular among those who would otherwise face a high capital gains tax bill for a highly appreciated asset.
A CRT allows you to place the asset in the trust. Over the life of the trust, you continue to receive income from it either through annuity payments or percentage payments.
When the trust reaches the end of the term, the asset belongs to the charity named when you set up the vehicle.
In sum, the benefits of a CRT include:
- Continued income from an asset
- Lower estate taxes
- Significantly reduced or eliminated capital gains taxes
- Final donation to charity at the end of the trust
Overall, the tax incentives are the biggest attraction of a CRT, so you’ll want to enlist the help of a tax attorney to set it up.
Charitable Lead Trust (CLT)
Charitable lead trusts (CLTs) allows a person or family to donate assets into the trust before sending the funds on to one or more organizations listed by the donor. Think of them as the opposite of a charitable remainder trust (CRT).
In most cases, a CLT serves as a vehicle to provide donations but to also leave tax-free gifts to the family of the donor. When money goes unallocated at the end of a specified period, the CLT passes on the remaining gift to the donor’s family. Families do not need to pay taxes on the funds, and they do not qualify for annual gift exclusion rates.
Unlike other vehicles, you can’t write donations to the trust off from your taxes unless you own the trust and are the donor. If you meet these requirements, you qualify for one deduction to use only in the year of the creation of the CLT.
Be sure to ask your tax attorney about deductions if they are your primary motivation.
The benefits of a CLT include:
- A reliable stream of income for a charity
- Left-over assets remain tax-free
- Removal of limits on annual gift exclusion
Overall, the most significant benefit of a CLT is reducing the estate taxes dramatically.
Private foundations are the most recognizable vehicle for charitable donations. A private foundation offers the most control over the assets donated and the most flexibility in the assets donated. It can also exist in perpetuity rather than coming to an end after a set term or the death of the donor.
Private foundations work well for those who wish to direct their wealth and hold specific ideas about where and how the asset should be disbursed. A private trust can offer activities like:
- Direct charitable activities
- International grants and donations
- Charitable programs
Donors find that private foundations provide the most flexibility and opportunity, but they also cost the most to run.
The benefits of setting up a private foundation compared to a CLT or CRT include:
- Double capital gains tax benefits
- Sheltered income
- Expanded giving opportunities
- Direct philanthropy
However, there are also disadvantages to this vehicle. These include:
- Regulatory requirements
- Recordkeeping requirements
- Excise tax
- Ongoing legal and accounting fees
- Lower deductibility
- Less favorability on some capital gains
Still, if you amassed significant wealth early in life and intend to leave a legacy that outlives you, there’s almost no better means than a private foundation.
Pooled Income Trust
A pooled income trust is for those who intend to leave behind an estate but one that’s of lower net worth.
In a pooled income trust, you’ll create a “pool” with several donors and donations to generate a single large trust. Named charities then invest the money and pay out to the donors according to the amount each contributed to the trust.
Most pooled income trusts accept only liquid assets including stocks, mutual funds, and cash. Rarely do trusts of this type take assets like life insurance, fine art, real estate, or restricted securities. However, enough hunting may bear some fruit.
The benefits of a pooled trust include:
- Immediate income-tax deductions
- Limitation of federal estate taxes
- Avoiding probate on the remaining balance of the estate.
These trusts also exist for those who want to extend their retirement income while remaining at home. These pooled trusts pay for necessary monthly bills, and the balance remains with the nonprofit running the trust (or to Medicaid) after the donor passes away.
Finding the Right Types of Charitable Trusts
Charitable giving can benefit your community, country, and even the world – and it can benefit you.
Before cutting a big check or drawing up a will, consider beginning your philanthropic journey today. With different types of charitable trusts available, you’re bound to find one that meets your unique financial situation, your family’s needs and your desire to give back.
Do you want to include charitable planning in your estate planning? Get in touch with charitable giving experts today.