If you’d like to set aside money for a charity as part of your legacy, a charitable trust can help you accomplish your objectives. Importantly, charitable trusts are not only just for the ultra-wealthy or high net-worth individuals. They are a strategic estate planning tool that can help you leave a gift to organizations and causes in which you believe. They can also offer several crucial benefits for you and your loved ones.
What is a Charitable Trust?
A charitable trust is a type of trust that allows its creator to pass property and assets to a 501(c)(3) charitable organization during their lifetime or when they pass away — depending upon how it is set up. These trusts are usually irrevocable, which means they cannot be modified once they have been created. In addition to not being able to change the terms of the trust, you would also not be able to take the assets back after they have been placed in the trust.
The trust document can name either a public charity or a private donation as a beneficiary. Organizations classified as public charities generally include churches, hospitals, and medical research organizations affiliated with hospitals or universities that have active fundraising programs. Public charities typically receive income in connection with the conduct of activities that further its tax-exempt purposes. In contrast, private foundations often have one major funding source rather than multiple sources — and their primary activity is usually making grants to other organizations.
Types of Charitable Trusts Used in Michigan
There are two main types of charitable trusts in Michigan: charitable lead trusts and charitable remainder trusts. A charitable lead trust provides financial support to one or more charitable organizations for a specified period of time. These trusts are designed to reduce a beneficiary’s transfer tax liability upon inheritance and can be funded with cash, stock, real estate, private business interests, and other assets.
Charitable lead trusts come in two different forms. They can be “grantor trusts,” where the person who donates funds to the trust remains the owner. The grantor can take an immediate tax deduction for the present value of any future payments that will be made to the beneficiary. A charitable lead trust can also be set up as a “non-grantor trust” where the owner is the trust itself — rather than the grantor. While the grantor cannot take an immediate tax dedication, the trust may take one for the funds distributed to the charity with no limits on the deduction. Non-grantor trusts are typically the better vehicle to use to accomplish the objective of reducing transfer taxes.
Charitable remainder trusts are designed to dispense income to either the creator of the trust or a non-charitable beneficiary for a specified time frame. At the end of the trust term, the named charity receives the remaining trust assets. These trusts can allow you to provide for a loved one during their lifetime, with the remaining assets in the trust being distributed to your charity of choice.
What are the Advantages of Setting Up a Charitable Trust
Charitable trusts are flexible vehicles that have many advantages when it comes to estate planning. For instance, they can allow you to have more control over how your assets are distributed to a charity than you would by including a provision in your last will and testament. Other reasons people choose to set up these types of trusts include the following:
Create a legacy for your family — A charitable trust can establish a family legacy of giving for younger generations.
Tax benefits — Charitable trusts can come with several critical tax advantages and can be used to reduce income and estate taxes.
Asset protection — By placing property in a charitable trust, you can safeguard your assets from creditors.
Income creation — While some charitable trusts only provide income for the tax-exempt organization that is a beneficiary, others can provide an income stream for the grantor themselves and other beneficiaries.
While there are numerous benefits that can come with placing your assets in a charitable trust, it’s also important to consider the drawbacks. Since charitable trusts are irrevocable, they usually can’t be changed or altered once they are set up. You should consider the predictability of your financial future and whether you might need the income at a later time to determine whether a charitable trust will work for you.
What are the Steps in Setting Up a Charitable Trust?
The first step that should be taken in setting up a charitable trust is consulting with an experienced estate planning attorney. They can advise you in accordance with the specific facts and circumstances of your situation to help ensure your objectives are met. You must also ensure that the charitable organization you'd like to provide for has tax-exempt status and is recognized by the IRS.
Once you have chosen your charity and calculated the amount you’re willing to put toward it, a trust instrument should be drafted. The trust document identifies the beneficiary, sets forth the terms of the trust, and specifies how the property should be distributed. Significantly, the trust must also be funded in order to be valid. This means property and assets must be transferred into the trust.
For real estate or other titled property, the title must be transferred to reflect the trust as the owner. Assets without titles can usually be transferred by simply signing a transfer document which states they are now owned by the trust. Banks and financial institutions often have their own processes that must be followed to transfer accounts to a trust.