Every year, thousands of people give money to support the charities and non-profits that they believe in most. Whether those donations are as little as $20 or as much as $2M, sometimes it makes sense to create a charitable trust to aid in your philanthropy efforts.

Basically, a charitable trust is a legal entity that assists in people’s philanthropic endeavors. When you establish and use a charitable trust, you essentially set aside a sum of money that is earmarked for giving. Once the trust is up and running, you have control over how the distributions are made. Two large benefits of these trusts is that you can designate someone to manage the trust on your behalf, and you can receive some fantastic tax advantages.

Two Kinds of Charitable Trusts

There are two main kinds of charitable trusts you can establish: remainder trusts and lead trusts.

When you establish a remainder trust, money and other assets are placed in the structured trust and  beneficiaries receive set amounts of monetary support from the trust’s interest gains every year until the trust expires. Upon the expiration of the trust, the beneficiaries will receive any assets that remain. These assets can be sold by the beneficiaries with no capital gains taxes being levied.

In a lead trust, the assets remaining at the end of the trust’s terms do not have to be awarded to the original beneficiaries of the trust. In most cases, the trust expires and the assets are given to the original grantor’s family members.

Benefits of a Charitable Trust   

Aside from the standard benefits of a tax deduction, you reap the following rewards with charitable trusts:

• Any assets that appreciate while part of the trust aren’t subject to capital gains taxes–even if awarded after the expiration of the trust
• There are certain income tax deductions that can be taken as a result of the present value of the remaining interest that will inevitably be rewarded to the beneficiaries
• The assets in a charitable trust aren’t part of a person’s taxable estate so upon death, these assets won’t be subject to estate taxes

How to Set up a Charitable Trust

You first should consult your lawyer to make sure a charitable trust is the best option for your financial situation and your philanthropic goals. Once you’ve decided to move forward, you can follow these easy steps to ensure a smooth process:

1. Calculate the sum of money/assets you’re able (and willing!) to put into the trust—remember that they cannot be removed once they become part of the trust
2. Determine beneficiaries and the logistics of how distributions will work
3. Have all documents drawn up professionally and signed in your presence
4. If you want to invest the money in the trust, decide how to do that upfront

 

What other tips do you have for establishing a charitable trust?