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Palm Springs Law Blog

Monday, September 5, 2022

What to Know About Charitable Trusts

Charitable trusts can help you support a tax-exempt charity and earn a tax deduction at the same time. These trusts do not necessarily make up part of your estate plan, but they can include provisions that activate at your death.

Charitable trusts are governed by complicated IRS rules. To make sure a charitable trust distributes your assets as you intended and earns the tax deductions you expected, you should consult a trusts lawyer and a tax expert before creating one.

Read on to learn some facts about charitable trusts.

How Trusts Work

A trust is a legal entity like a partnership. It involves a web of property interests and fiduciary relationships.

A trust involves three entities:

Grantor

The grantor, also called the settlor, puts property into the trust. The property could take any form, including:

  • Money
  • Securities (such as stocks)
  • Real estate

The property in the trust is called the trust corpus. The trust has legal ownership of the trust corpus. Thus, John Doe could work with a trust lawyer to create the JD Trust to hold all of his property. The deeds and accounts for that property will list the JD Trust as the owner.

Trustee

A trustee is a person or business. The trustee does not own the trust corpus. The trustee administers the trust for the benefit of the beneficiaries.

Continuing with the example, John Doe could appoint State Bank as the trustee for JD Trust. State Bank must administer the trust according to the trust’s terms. And it owes the beneficiaries several fiduciary duties, including loyalty, due care, and diligence.

Beneficiary

The beneficiary is the person or organization that receives the financial benefits of the trust corpus. The beneficiary has equitable ownership of the assets. This means the beneficiary has a true property interest in the trust assets. But the beneficiary cannot control the assets because the beneficiary lacks legal ownership.

Suppose JD Trust was created for the benefit of John Doe’s children. State Bank must always act for the benefit of the children while still following JD Trust’s terms.

Types of Charitable Trusts

To understand how charitable trusts work, you must understand two facts about trusts. First, the same person can fill multiple roles. Thus, the grantor might also act as a beneficiary.

This happens in a living trust where an estate plan includes placing all of your assets into a living trust. The living trust then gives the benefits of the trust corpus to you for the rest of your life. You are both the grantor and beneficiary.

Second, the trust terms can create multiple beneficiaries with split interests. In a charitable trust, interests are split in time. A charity receives a distribution of property before or after other beneficiaries receive their distribution of property. The sequence of these distributions determines the type of charitable trust.

Charitable Lead Trust

In a charitable lead trust, property is distributed from the trust to a charity for a set term. When the term expires, the remainder of the trust corpus goes to the remaining beneficiaries.

Thus, you could set up a trust to pay interest and profits from the trust corpus to a designated charity during your lifetime. When you die, the remaining trust assets go to your spouse and children.

Charitable Remainder Trust

A charitable remainder trust has the opposite sequence. Trust assets are distributed to non-charitable beneficiaries for a set term. At the end of the term, the remainder of the trust assets goes to a designated charity.

For example, you could set up a charitable remainder trust to support your minor children after you pass. When your children turn 18, the trust assets would go to a designated charity.

Using Charitable Trusts in Your Estate Planning

The IRS provides tax benefits for charitable donations. Charitable trusts can allow for tax deductions during your lifetime and reduce your estate value for estate tax purposes after your death.

To learn how to use charitable trusts in your estate plan, schedule a free consultation with Heritage Legal, PC, a wills and trusts law firm in Palm Springs, CA.


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