A charitable trust is one of the most visible entities funding nonprofit organizations in the country today. You may have seen acknowledgments for their contributions to public radio and television stations, arts and science organizations, or even your alma mater.
If you’ve been considering establishing a charitable trust to meet your giving goals, it’s time to get familiar with the two main types—charitable lead trusts and charitable remainder trusts.
Charitable Lead Trusts
- Donors use assets to fund the trust. They specify how long the trust will operate—which can be a certain number of years or the lifespan of one or more individuals. Donors can often choose to take an immediate partial tax deduction at the time they establish the trust.
- Typically, the investment of assets follows, which means that they can grow over time. On the other hand, this also means that they are subject to losses.
- Over the specified amount of time the trust is in existence, regular distributions are sent to the donor’s 501(c)(3) nonprofit organizations of choice.
- After the time span of the trust ends, the remaining assets are distributed to the donor or their beneficiaries. Depending on how the trust is structured, the tax burden can be decreased or even eliminated here.
- Charitable lead trusts are not tax-exempt. This tax exemption means that non-grantor charitable lead trusts will be taxed like any other complex trust, with undistributed income taxed at trust rates. However, grantor charitable lead trusts are taxed like other grantor trusts, with the donor taxed only on the portion of the trust that he or she owns.
Charitable Remainder Trusts
These kinds of trust are often described as the inverse of charitable lead trusts.
- The initial setup for charitable remainder trusts is much the same as that of charitable lead trusts. Donors fund the trust with their assets and specify a time period for the trust to operate. They are also eligible for a tax deduction when they establish the trust.
- The assets are invested and can grow or diminish based on how they perform.
- Instead of the charities receiving distributions during the time the trust is in operation, the donor or their beneficiaries receive the distributions, which are taxed as income.
- When the time span of the trust ends, the remaining assets are given to the designated 501(c)(3) nonprofit organizations.
When it comes to your unique financial situation, it’s crucial to understand every avenue that may be available to you when setting up a charitable trust. While the process may be confusing at first, engaging with the proper team can alleviate stress by offering step by step guidance. For more information regarding the differences between a charitable lead trust or a charitable remainder trust, and determining which may be the right fit for you, reach out to your CRI professional.