We all want to support critical causes and other passion projects. But, often, it’s hard to strike a balance between helping these important organizations and preserving your family’s wealth and assets. The simple solution? Increasingly, it’s becoming targeted charitable trusts, designed to balance investors’ desire to do good with their desire to safeguard their families’ futures.
Understanding Charitable Trusts
Charitable trusts not only allow donors to direct funds toward specific charities and causes they support but, also, drives lucrative income and estate tax benefits for contributors. For wealthy families, this may result in hundreds of thousands of dollars in savings per year while, at the same time, leaving a positive mark on your community and the world as a whole.
The Different Types of Charitable Trusts
Charitable trusts allow supporters to set aside funds for one or more philanthropic purposes. There are two types of “split-interest” trusts: charitable remainder trusts (CRTS) and charitable lead trusts (CLTs). These funds give a portion of the investment to the charity or charities of a donor’s choosing, plus set a portion aside for a non-charitable beneficiary.
The main difference between the two is when the beneficiaries review their funds. CLTs give the beneficiaries income interest for a set number of years or over the course of a person’s lifetime and releases the remaining funds at the end of the trust term. CRTs, meanwhile, the non-charitable beneficiary receives the income interest, and one or more charitable organizations receive the remainder of the assets. These two types of charitable trusts let donors control how much of the funds the beneficiaries receive and when, and how much their heirs benefit from the trust.
The Benefits of Charitable Trusts
Given their unique structure and versatility, there are lots of benefits that come from investing in charitable trusts, including:
Income tax benefits tied to charitable trusts depend on the type of trust as well as applicable tax codes -- which, recently, have changed considerably. In most cases, donors can either receive a partial income tax deduction based on the total value of the assets they intend to invest, or they can receive the entire charitable income tax deduction the year the funds are dispersed. Keep in mind, charitable trusts are not tax exempt but, at the same time, they give donors the opportunity to preserve highly appreciated assets, reduce estate taxes and qualify for income tax deductions.
Maintain the value of appreciated assets
Individuals with highly-appreciated assets and non-income producing property can preserve the value of their asset by selling them within the charitable trust. This, then, makes the asset tax-exempt and preserves their full market value, subject it to capital gains taxes.
Reduce estate taxes
Donor assets used to fund these trusts typically come from investors’ estate. By reallocating these funds to the trust, donors can reduce the amount of tax their estate has to pay at the time of death which, immediately, preserves wealth for future generations. Funds in charitable trusts may also qualify for a gift tax deduction.
Income streams from physical assets
If a donor has a property that doesn’t produce income but they’d like to use it for income purposes, it’s easy to sell and put the remainder into the trust. In turn, this creates an income stream that benefits the donor directly -- again, another unique attribute of these funds. Donors can also opt to wait and take the income until their tax bracket is lower.
Charitable trusts require planning and an initial setup but, from there, tend to be very easy to maintain and support over time, while supporting two diverse -- and, often, competing -- interests. Consult your financial advisor to learn more and to structure your charitable trust so it best serves your wants and needs, now and in the future.