Charitable trusts are trusts that provide a great way to give back to the community. They are, however, typically irrevocable once created. You must weigh your purpose and needs against the benefits and disadvantages.
Understanding Charitable Trusts
A charitable trust is a way for a person to donate certain assets to a tax-exempt charitable or non-profit organization. There are two different kinds of charitable trusts.
Charitable Lead Trusts
A Charitable Lead Trust (CLT) has a certain amount of its income set to go to a charitable organization. The amount that remains will either stay in the trust or be disbursed to the trust's beneficiaries (designated by the trust grantor). These types of trusts are most beneficial to beneficiaries that do not depend on the trust as a main source of income.
Charitable Remainder Trusts
A Charitable Remainder Trust (CRT) operates differently than a CLT. Beneficiaries are paid a certain predetermined amount, and the remainder is then paid to the charitable organization. These types of trusts are a better choice when the beneficiaries depend upon the money from the trust as a main source of income.
Benefits of a Charitable Trust
There are several reasons why people choose to place their assets in charitable trusts because it's not only the charity that benefits. Here is a brief overview of these benefits.
There are certain tax benefits that may be available immediately to donors of charitable trusts, and additional benefits when it comes to reducing the estate taxes.
Placing property in a charitable trust can be a valuable way to protect assets from creditors.
Creation of Income
Placing assets in a trust and then selling them may be a way to create income without incurring any tax liability.
Disadvantages of a Charitable Trust
There are several reasons why people decide against placing their assets in charitable trusts. Here are a few of those reasons, but it is always best to speak to a charitable trust attorney in State to know for sure what will work best for your needs.
Unable to Amend
Charitable trusts are irrevocable, which means that once it has been established, the terms are unable to be easily amended (if at all). For some, the unpredictability of their financial future and the inability to change the trust should they need the income at a later date is enough to prevent them from choosing a charitable trust.
Establishing and operating a charitable trust includes costs and fees that are enough to stop some people from using them.
Some family members may not understand how trusts work or do not like the donations being made to the charitable organization, creating tension among family members.
Terminating a Charitable Trust
A CRT is terminated when the income stream that is designated for the beneficiaries (not the charity) ends. The remaining property in the trust is then disbursed to the charitable organization.
A CLT has a certain set term in which it is to operate and then when it ends, the remainder is distributed to the beneficiaries (not the charity).
Sometimes circumstances arise which cause the need or desire for a charitable trust to be terminated early. Nevertheless, as it is irrevocable, it is highly unlikely that early termination is possible.