What are Charitable Trusts?

Charitable trusts are financial accounts that allow people to donate money to charity and get a tax break for themselves and their heirs. In order for people to set up charitable trusts, they must relinquish legal control of their property. This action typically is irrevocable once the trust has been set up. These kinds of trusts are generally not meant for people who prefer to gift occasional donations. Rather, charitable trusts are usually part of overall estate planning.

Charitable Lead Trusts are sometimes chosen by people who expect high gift and estate taxes as a result of transferring their money to appointed heirs. While planning their trusts, donors normally specify how long they want the trust to last. Charities set up under a Charitable Lead Trust usually receive money throughout the life of the trust.

There are two forms of trusts that are part of the overall Charitable Lead Trust category. The first form is the Grantor Lead Trust. With this type of trust, when the trust term is completed, the trust's assets typically are returned to the donor. The second form is the Non-Grantor Lead Trust. With this type, when a trust term has ended, the assets usually are transferred to the donor's designated beneficiaries.

Charitable remainder trusts are another type of commonly used trust. The donor starts the trust and transfers in money that is to go to a selected charity. The receiving charity typically needs to have a tax-exempt status.

Tax benefits usually vary for charitable remainder trusts, depending upon the amount donated and how long the trust has been set up to last. Deductions will typically be made based on an estimate of how much income is likely to be earned during the trust period. Donors usually have the option of receiving annual fixed annuity payments, but in general, the higher the payments, the smaller the tax deduction. There is also the option to receive a fixed annual percentage of the trust assets, with the assets being reappraised each year.

With charitable remainder trusts, the selected charity becomes the trustee and invests or manages the money so the donor or the donor's heirs receive an income from it. The donor usually selects the amount of time income will be received. This payment period information is then placed in a trust document. Then, upon the donor's death or at the end of the income period, the remaining assets go to the selected charity.