Charitable trust: A strategic tool that builds on your legacy
Like other types of trust, a charitable trust includes a settlor (person who creates the trust, a trustee (person who manages the assets) and one or more beneficiaries (those who receive the assets). However, in the case of a charitable trust, at least one of the beneficiaries is an organization, not a person.
A charitable trust can serve as a strategic estate planning tool and a way to support causes that are important to you.
In Michigan, all charitable trusts fall into two major categories.
Charitable lead trust
In this type, the trust is set up to distribute your assets to a charitable organization, which receives the initial proceeds from these assets.
After you pass, or after a specified number of years, the remaining proceeds in the trust are distributed to your other beneficiaries.
If you make regular gifts to a charity, this type of trust can offer an alternative way to support that charity while getting the other benefits that a trust provides.
Charitable remainder trust
This type of trust works in reverse. It is set up so that you or your non-charitable beneficiaries receive the initial proceeds from the sale of the assets in the trust.
After you pass, or after a specified number of years, the remaining proceeds in the trust are distributed to the charity.
A charitable remainder trust may be a good option if you have non-income-producing assets (such as investments or real estate). By placing these in a charitable trust to be sold, it allows you to receive annual payments from the proceeds without paying capital gains taxes on this sale.
Other key considerations for a charitable trust
Not just for the wealthy: Any family can benefit from this type of estate planning strategy.
Types of charities: To be eligible as a beneficiary, the charity must be recognized by the IRS as a tax-exempt, 501(c)(3) organization.
Tax advantages: The specific tax benefits will depend on several factors, including whether you are setting up a charitable lead or remainder trust. However, both types allow you to earn a charitable tax deduction during your lifetime, reduce the size of your estate and lower estate taxes.
Asset protection and avoiding probate: Placing assets within any type of trust effectively removes these from your estate. This offers two large advantages – it protects these assets from creditors and automatically allows these assets to bypass probate court.
Irrevocable: You cannot change the trust to remove assets after it’s established. For this reason, you should consider whether you’ll need these assets in the future before placing them in a trust.
Flexibility: While you cannot alter the assets that are included in the trust, you can structure the trust so that it allows you to choose your charity or charities later.
Alternatives: Many local community foundations – such as the Community Foundation of St. Clair County or other charitable organizations – allow for donor-advised funds that might be a more cost-effective method to charitable giving than a charitable trust. They are also often good resources for potential donors to discuss charitable giving.
Supporting a charity whose work will outlive you is one way you can ensure that you’re passing on your values. In addition, this can set an example for your family and other loved ones, encouraging them to do the same and establishing a legacy of giving.
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Buzz Suuppi
Buzz started The Plan Firm for his family, which is everything to him. Every member of his team is committed to providing effective estate planning and related solutions for families in St. Clair County, Michigan.