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Benefits Of A Charitable Trust

There are numerous benefits for both donors and beneficiaries in charitable trusts. Below are examples.

Tax Benefits
Charitable trusts have tax benefits for the donor, the donor’s heirs, and the selected organizations. Tax benefits are applied differently depending on the type of charitable trust created. Generally, charities benefit because they are exempt from paying most taxes. Donors benefit by receiving an income tax reduction in the tax year the donation was made. Donors’ families (or other named beneficiaries) benefit by paying less in gift and estate taxes.

Avoid Probate And Prevent Family Disputes
When a loved one dies, the probate process is one of the most stressful experiences for family members. Court intervention is usually required in this process, especially in high-conflict situations. With a charitable trust, families can avoid probate for the assets placed in the trust. Placing the assets in a trust can avoid stress, time, and excess money spent in the court’s probate system.

Similarly, high net-worth individuals may have children, grandchildren, siblings, and friends who might feel slighted if they believe they have been forgotten or treated unfairly. Heirs of those estates can spend months or years fighting in court, often at the expense of the assets in the estate. When donors create charitable trusts, they prevent family disputes in two ways. First, the charitable trust avoids the opportunity to argue in probate. Second, there can be a greater sense of fairness among heirs since no heir gets the assets in the charitable trust.

Personal Satisfaction
Often, the biggest reason for creating a charitable trust is the positive feelings and personal satisfaction of giving to a favorite charity. Whether the chosen charity is new or well-established, donors often report feeling optimistic about the future when they know they have left a part of their legacy to a charity.

Types Of Charitable Trusts

Charitable trusts can be created in a few different ways. Generally speaking, there are two types of charitable trusts — charitable remainder trusts and charitable lead trusts. Each trust has distinct tax benefits.

Charitable Remainder Trust

In this trust, a donor identifies assets to go into the trust while the donor is living. The donor keeps any income generated from the donation. Once the donor passes away, the property becomes the charity’s property, and the organization benefits from the asset and the income it generates. Property in the trust can include personal property, real property (homes and land), and stocks and bonds.

For example, consider a donor with a rare artwork collection worth $500,000. The donor can place the artwork into a charitable trust and list their favorite art museum as the beneficiary. The art museum would take the artwork for its use while the donor is still living, but the donor would keep any income generated from the artwork’s presentation at the museum. Once the donor passes away, the art museum immediately takes possession of the artwork and keeps any income generated by its feature at the museum.

Charitable remainder trusts can also help family members live comfortably after the donor passes away. In an annuity trust, a different person, usually a spouse, can receive the income generated by the property for a set time or the rest of the spouse’s life. Once the period expires or the spouse dies, the property and any future income belong to the charity. No matter how the trust is set up, charitable remainder trusts can reduce estate and gift taxes for beneficiaries who ultimately benefit from the donor’s estate, including family and friends.

Charitable Lead Trust

In a charitable lead trust, the identified property remains with the donor’s estate in these trusts. However, a charity will receive any income generated on the property for a set time when the donor passes away. Once that period expires, the property and any money it generates are immediately transferred to another beneficiary. For example, perhaps a donor owns a large, historic mansion that generates income from tours and weddings. In a lead trust, the donor could name a local university as a beneficiary and donate the income generated to the university for ten years. After that time, the mansion and its income pass to a different beneficiary the donor has selected.

Charitable lead trusts can begin as trusts while the donor is still alive, or they can be created in a will. Either way, the non-charitable beneficiaries, such as family members or friends, can save significant amounts of money on the estate, gift, or income taxes.

Speaking with an experienced estate planning attorney is the best way to determine which trust is most appropriate for a particular case.

Additional Resources

Guide for Charities | California Department of Attorney General
The California Attorney General’s website provides resources for those interested in leaving part of their estate to a charity. The public can learn the legal definition of charities, learn more about California charity laws, receive assistance in evaluating a charity, and find answers to frequently asked questions.

California Laws | Supervision of Trustees and Fundraisers for Charitable Purposes Act
The State of California has laws guiding donations to charitable organizations. Although an estate planning attorney is in the best position to answer questions, interested individuals can find information about the laws in California.

Charitable Trust Services in Ventura County, Los Angeles County and Central California

If you would like to incorporate philanthropy into your estate planning, contact the knowledgeable estate planning attorneys at Botti & Morison. Charitable gifting not only supports an organization close to your heart but also enables you to reap the tax benefits available.

Chris Botti and Paul Morison at Botti & Morison have practiced estate planning for decades and can help you craft an effective charitable trust.