As discussed in previous articles, there are many ways to give to charities in a tax-efficient way. For larger gifts that also incorporate elements of estate planning, charitable trusts and foundations are useful tools, but because of their complexity and legal and administrative costs, their use should be targeted to specific situations.
As with other trusts, charitable trusts are legal arrangements that enable a trustee of your choice to distribute assets to your beneficiaries at the time you direct in the trust document. They can be useful in some cases to guard inheritances for younger beneficiaries, protect assets from creditors and other parties, minimize taxes, and allow a degree of control over the assets after death. What distinguishes charitable trusts is that a charity benefits from the trust either during or after your life. Charitable remainder trusts and charitable lead trusts are two commonly used types of charitable trusts.
What is a charitable remainder trust?
Charitable remainder trusts allow you or another beneficiary to receive income from the trust for your lifetime, the lifetime of another person, or a specified period of up to 20 years. At the end of the specified term, the remaining trust assets are distributed to one or more charitable organizations. The greatest benefit of a charitable remainder trust is that you can take advantage of immediate tax benefits while continuing to utilize the assets, as you may deduct the present value of the amount that is expected to go to charity. The assets in a charitable remainder trust would also be shielded from certain estate taxes upon your death.
What is a charitable lead trust?
A charitable lead trust is essentially the inverse of a charitable remainder trust. Instead of you or your family receiving income during your lifetime, one or more charities would receive payments during your life. At the end of your life (or the specified term of the trust), the remaining assets would be distributed to your family members or other beneficiaries that you designate. It’s important to note that both types of charitable trusts tend to be complex to set up and usually require ongoing legal and administrative support.
Private foundations
A private foundation can also be part of a strong charitable strategy. A foundation is an actual qualified charity established by an individual, family, or corporation. It offers donors a great deal of flexibility and control over their gifts but can be costly to administer. A private foundation must also adhere to a strict set of rules designed to ensure that it carries out its charitable purpose. Because of the costs associated with foundations, they are usually more appropriate if funded with at least $1 million. And since much of this work can be accomplished with donor-advised funds, foundations are generally better suited for those who wish to fund direct charitable work, rather than fund other charities.
For example, if you wanted to use funds to support Doctors Without Borders, it would likely be easier and less expensive to do so through a donor-advised fund. If, however, you wanted to assemble an independent team of doctors and fund their mission to deliver medical aid around the world, a foundation may be a better way to accomplish that.
Both trusts and foundations are complex and costly to implement, but in the right situations, they can be powerful tools to increase your charitable impact and help with the execution of your estate plan.
If you have questions about your charitable giving strategy, please fill out our contact form and a team member will be in touch soon to schedule a consultation.
Odyssey Group Wealth Advisors does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
