A trust is an estate planning instrument that allows you to transfer assets to the beneficiaries of your choice in the manner that you wish. However, it’s essential to be aware that a beneficiary doesn’t always have to be a person — it can also be a charity. A charitable trust can allow you to support a cause you believe in while taking advantage of several crucial tax and estate planning benefits.

How Do Charitable Trusts Work?

A charitable trust is an instrument that distributes assets to a charity over a specific period of time. As with other types of trusts, it involves three parties — a grantor (also referred to as a donor) who establishes the trust, a trustee who manages the assets in the trust, and a beneficiary who receives the trust assets. Importantly, in order for the trust to be valid, it must be funded. A trust can be funded with assets such as cash, stocks, real estate, business interests, or other types of property.

The trustee is responsible for investing the assets in the trust and managing them during the term of the trust. Any growth in the trust is tax-free. Depending on the type of charitable trust and how it is structured, distributions must be made regularly to either the donor or charity and the remaining assets will be passed to the donor’s heirs or the charity upon termination.

Types of Charitable Trusts

There are several different types of charitable trusts that can be set up, based on your specific estate planning goals. To determine the best type of charitable trust, you should consider a variety of factors, such as your philanthropic objectives, your income needs, the potential tax implications, and how much control you wish to have over the distribution of the assets. Some common types of charitable trusts include the following:

• Charitable remainder annuity trust (CRAT) — A charitable remainder annuity trust is a type of irrevocable trust that allows you to contribute assets to a charity while drawing a fixed income for life or a certain period of time not to exceed 20 years. The remaining assets are then bequeathed to a charity of your choice. Since these types of trusts are irrevocable, the terms cannot be changed and the ownership of the assets belongs to the trust, not the grantor.
• Charitable remainder unitrust (CRUT) — A charitable remainder unitrust is a type of trust that pays a fixed percentage of the value of the trust each year to a non-charitable beneficiary. Generally, the payments must equal at least 5% and no more than 50% of the fair market value of the assets within the trust.
• Charitable lead annuity trust (CLAT) — This type of trust is structured in such a way that the charity has the lead interest. It allows you to receive an immediate tax deduction for the full value of assets that were put into the trust. The remaining assets in the trust are then given to non-charitable beneficiaries.
• Charitable lead unitrust (CLUT) — A charitable lead unitrust is a type of irrevocable trust that allows you to transfer assets into the trust with a portion of the trust’s value being distributed to a charity each year as a lead interest based on a percentage of the trust’s net asset value. The remaining assets are then distributed to your chosen non-charitable beneficiaries.

Other types of charitable trusts can include donor-advised funds which give you the ability to distribute assets to different charities over a period of time — and private foundations, which can be structured as a type of charitable trust instead of a not-for-profit.

What are the Benefits of a Charitable Trust?

There are many benefits that can come with setting up a charitable trust. Not only can it be a flexible financial planning tool and provide for your beneficiaries — but it can also allow you to give to a cause in which you believe. Providing support to a philanthropic organization can help you make a lasting impact and leave a legacy that reflects your values.

In addition, a charitable trust can provide a grantor with several critical tax benefits. While generating income, these trusts can reduce estate tax liabilities with an income tax charitable deduction. Capital gains taxes can also be avoided for appreciated assets.

Apart from investment risk and irrevocability, there are very few drawbacks to creating a charitable trust. However, setting up a charitable trust is complex and takes careful planning. It’s vital to have a skillful attorney who can best advise you regarding the benefits of these estate planning vehicles and your options. They can help ensure you are making the right choice concerning the distribution method utilized and you understand the potential tax implications.

Contact an Experienced Ohio Estate Planning Attorney

If giving to charity is one of your estate planning goals, it’s important to have a knowledgeable attorney by your side who can help you ensure your wishes are carried out. At Middleton Law Offices, we offer personalized time and attention to every client and work closely with them to meet their estate planning objectives.

Located in Bowling Green, Middleton Law Offices has been serving clients in Ohio regarding their estate planning matters for more than a century. Contact Middleton Law Offices today at 419.548.0196 for a consultation to learn how we can help.

Articles appearing in this column are intended to provide broad, general information about the law. This article is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.