Charitable Trusts

This type of irrevocable trust is often used by donors who want some or all of their estate proceeds to be given to a particular charity. The trust may be created while the donor is living or at death as part of a trust or will.

There are several categories and sub-categories of charitable trusts:

• Charitable lead trust―The trust makes payments to the designated charity during the term of the trust, after which the remaining assets can be returned to the donor or given to beneficiaries. Options include:
• Charitable lead annuity trust―Payments of a fixed amount are made
• Charitable lead unitrust―Payments of a specific percentage of principal are made
• Charitable remainder trust (a.k.a. Section 664 trust or split interest trust)―Usually tax-exempt, a charitable remainder trust generates income for the beneficiaries during the term of the trust, after which the remaining assets are paid to the charity once all beneficiaries have been paid. Options include:
• Charitable remainder annuity trust―Payments of a fixed amount are made
• Charitable remainder unitrust―Payments of a specific percentage of principal are made

Benefits

• As long as the trust and charity meet the IRS’s requirements for 501(c) entities, donations made by individuals or corporations may be tax deductible.
• Depending on the type of charitable lead trust chosen, a donor may be able to claim a charitable income, gift or estate tax deduction.
• In a charitable remainder trust, if appreciated assets are sold to fund purchases of other property in order to diversify the portfolio, the trust will not usually be subject to an immediate capital gains tax.
• Charitable remainder unitrusts are often used as a key strategy in retirement planning due to their income distribution flexibility.

Cautionary notes

• Making a donation to a non-grantor charitable lead trust will not usually provide an income tax deduction, though it does reduce asset value from the donor’s estate to minimize the impact of estate taxes in the future.
• Charitable remainder annuity trusts offer less flexibility. But they may be appropriate when donors fund the trust with marketable securities or cash without regard to the effects of inflation on income distribution.

Descriptions of trusts are intended to be informational and are not specific recommendations. Contact a trust officer at Sterling Trustees for more detailed information on what would be best suited to your circumstances.