If your estate planning goals include establishing a lasting legacy through charitable donations, aside from making outright gifts (which will make sense for certain people under certain circumstances), your two primary options are: (i) to establish a trust, or (ii) to establish a foundation.
But, how do you choose? And, once you choose, how do you ensure that your charitable motivations will continue to be served after you are gone? These are important questions, and finding the answers starts with gaining a better understanding of the options that you have available.
What Is a Trust?
A trust is a legal arrangement pursuant to which one person (the “grantor” or “settlor”) entrusts assets to another person or organization (the “trustee”) to manage for the benefit of others (the “beneficiaries”). Now, this is an oversimplified definition, and with certain types of trusts (such as the revocable living trust), a single person can serve as grantor, trustee, and beneficiary; but, this provides a good foundation for our discussion of charitable trusts.
Under the right circumstances, establishing a charitable trust can have numerous benefits. Some of these benefits include:
- Tax Savings. By transferring assets to a charitable trust, you can often avoid income, capital gains, and estate taxes that would otherwise need to be paid by you or your estate.
- Asset Protection. Since assets that you transfer to a trust are no longer considered your property, establishing a trust can help shield your charitable gift from the risk of loss, should you face a lawsuit or incur another substantial liability.
- Enhanced Certainty. Most forms of trusts are recognized by state and federal courts around the country, and you can use your trust documents to establish clear rules around your charitable donation. As a result, when you use a trust for your charitable giving, you can feel confident that your final wishes will be carried through.
Of course, the trust structure has certain limitations as well. Among them, when establishing a trust for charitable purposes, the trust will often need to be irrevocable. This means that you will not be able to pull assets back out of the trust should you need to do so in the future. There are costs involved with establishing a trust as well, though these costs will often be offset by the tax benefits involved.
What Is a Foundation?
A private foundation is a tax-exempt organization generally established as either a trust or corporation under state law. Management responsibility rests with directors or trustees, and one of the main distinguishing factors from stand-alone charitable trusts is that private foundations can accept contributions from multiple donors. As a result, private foundations are often used by families seeking to establish a lasting charitable legacy, allowing for family members’ gifts to be pooled and then distributed to outside organizations (or used in-house) at the direction of the foundation.
However, the founders also have the ability to establish permissible donees and assert additional controls over the foundation’s operations as well, making foundations particularly attractive to those who have altruistic goals that they wish for their loved ones to continue to pursue after their death. As a result, whether your hope is to help finance a major international charity, to establish an enduring support fund for a local cause or organization, or even to establish your own operating charitable entity, you can use a private foundation to achieve your goals.
Like charitable trusts, private foundations can offer significant tax benefits for donors and their estates. Donors also have the option (also similar to trusts) to make contributions during their lifetimes, at death, or both.
Types of Charitable Trusts
The two most common forms of charitable trusts are: (i) the “charitable remainder trust,” and (ii) the “charitable lead trust.”
1. Charitable Remainder Trust
With a charitable remainder trust, the grantor establishes the trust and names a specific charitable organization as the trustee. This organization must receive IRS approval, which generally (though not universally) requires a 501(c)(3) designation. The grantor then funds the trust (usually with appreciated assets for tax purposes), and then the charity takes over responsibility for managing the assets as trustee. The grantor has the option to receive either a fixed annuity or a percentage of the trust’s value on an annual basis for his or her lifetime or a period of years; and, upon the grantor’s death, the charity takes possession of the trust’s assets.
2. Charitable Lead Trust
A charitable lead trust operates much the opposite of a charitable remainder trust. With a charitable lead trust, the charity receives income payments for a period of years or the grantor’s lifetime, and then upon the grantor’s death the trust assets transfer to named non-charitable beneficiaries. There is also the option for the trust assets to be redistributed to the grantor prior to death.
Depending upon the grantor’s goals, a charitable lead trust can be structured as any of the following:
- Qualified reversionary grantor trust
- Qualified nonreversionary grantor trust
- Qualified nonreversionary nongrantor trust
- Nonqualified reversionary nongrantor trust
Please check with your Estate Planner no matter how small your assets may be, especially if you own property: I.E. Bank accounts or Land.