Maybe you have a cause that’s dear to your heart, and you’ve been debating ways to support it. You have the assets to make a large donation — but you’re not sure that a straight cash gift is the best way to leverage your resources. You may be right.
A charitable trust could be worth considering, allowing you to do good, and also providing the opportunity of financial benefits for yourself and even your heirs. This overview explains what charitable trusts are, how they work and how they might fit into both your philanthropic goals and your financial plans.
What is a charitable trust?
When you set up a charitable trust, you transfer legal ownership of an asset (such as cash or securities) to the trust, which benefits an IRS-approved charity or charities of your choosing. These are irrevocable trusts — once you put the asset in, you can’t take it back.
Charitable trusts allow you to support a cause you care about not just once, but over a period of years. It also may provide income for yourself or your beneficiaries in certain situations, and it can provide tax advantages.
For instance, donations to charitable trusts may allow you to earn a charitable income tax deduction. And, since they remove the asset from your estate, they may help lower potential estate tax implications for your heirs. Creating a charitable trust may also allow you to liquidate an appreciated asset without paying capital gains tax. That’s because if the charity sells the asset you place in the trust, the charity takes on the profit and thus any capital gains impact.
Two types of charitable trusts
There are two main types of charitable trusts: charitable remainder trusts and charitable lead trusts.
1. Charitable remainder trusts. In this case, you will receive an income from the asset you place in trust for a period you set, such as 10 or 20 years. You determine frequency of payouts, such as monthly, quarterly or annually.
You also choose whether to receive income as a fixed dollar amount or a percentage of the asset’s value. (The percentage must be at least 5%, according to IRS rules.) Remember that your income payouts will impact the amount left in the trust for the charity.
Once the trust period expires or you die, the remainder of the funds in the trust go to the charity or charities of your choosing.
2. Charitable lead trusts. In this case, an annual income stream from the asset you place in trust goes to the charity or charities of your choosing, based on a percentage and time frame you determine. The remaining assets stay in the trust. When the trust period expires or you die, the asset goes to your beneficiaries, and payouts to the charity end.
This strategy means you don’t get annual income from your asset. But it also lets you protect (and potentially grow) the asset for your heirs without any potential appreciation of the assets increasing your taxable estate.
A team effort
Charitable trusts are complex instruments, and it’s smart to get assistance from a team of professionals when you consider setting one up. This would include an estate planning attorney to draft the documents, an accountant or tax advisor who can discuss the impact to your income and estate taxes, a financial advisor who can help you see how the trust fits into your overall financial strategy and a trustee to manage the assets of the trust. Talking with your team can help you determine how much you want to give to charity, the type of asset you want to donate and what payout you hope to receive for you or your beneficiaries.
Charitable trusts can also involve a significant administrative burden — making sure the charity is paid appropriately, meeting investment and IRS requirements, filing tax returns and so on. One option to help manage these tasks is to have a corporate fiduciary, such as Hancock Whitney, serve as trustee.
How we can help
Charitable trusts can be a way to support a cause close to your heart, while also gaining financial benefits for yourself and your heirs. If you’re interested in learning more about them or you’re ready to take the next step, your Hancock Whitney team can help you review the options and implications.