The Gift of Lasting Generosity

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Philanthropy is one of America’s greatest values and there are a variety of reasons why people make gifts. It may be to assist a favorite charity, to reduce taxes, or perhaps to establish a lasting memorial to themselves, a friend, or family member. Most gifts are made directly to charities. However, gifts can also be made through the use of trusts.

Some of the advantages of using trusts to make charitable gifts include providing a source of life-time income to an individual or individuals, avoiding estate and capital gain taxes by transferring highly appreciated property, and the feeling a person receives by making a commitment to a charity which shares their particular interests.

The types of trusts that can be used in making gifts include a charitable trust and a private foundation. These are sophisticated but commonly used methods of making charitable gifts through trusts.

Charitable Trusts
There are essentially two types of charitable trusts: charitable lead and charitable remainder. Both of them provide benefits to a charity and a non-charitable beneficiary such as the donor, the donor’s family or to any person chosen by the donor.

With a charitable lead trust the charity receives benefits annually from the trust for the life of the donor or for a certain period of time.

Upon the donor’s death or after the specified period of time has elapsed, the balance of the trust is either given back to the donor or to other non-charitable beneficiaries. Since the charity receives benefits first from the trust, it is the lead beneficiary. Thus, the trust is called a charitable lead trust.

The annual payment from the trust to the charity can be calculated in a couple of different ways. If the payment is a fixed amount, the trust is a charitable lead annuity trust. If the payment is recalculated annually, then the trust is a charitable lead unitrust.

A charitable remainder trust is similar to the charitable lead trust, except the beneficiaries are reversed. In this case, the individual receives benefits annually and the charity, as the remainder beneficiary, receives the balance upon the death of the donor or termination of the trust. Like a charitable lead trust, the charitable remainder trust can be either an annuity trust or a unitrust depending on how the annual payment is determined.

Private Foundations
Another method of gifting to a charity through the use of a trust is the private foundation. A private foundation can be created either in the form of a corporation or a trust. In most instances, trusts are easier to manage than corporations. If it is created as a trust, the individual creating the private foundation can name a trustee and make contributions directly to the trust.

Funds held in the foundation would be invested and grants could be made from the foundation to charities selected by the trustee or as specified by the trust document. Contributions to private foundations are deductible for gift, estate and income taxes. Also, private foundations themselves are exempt from federal income tax.

While there are restrictions that must be observed, such as making the trust irrevocable, the advantages of using a charitable trust or foundation in charitable giving can be very valuable to a family’s gifting and estate plans.

If you are interested in setting up a charitable trust or foundation to meet your family’s gifting and estate needs, consult your legal and tax advisors early in the process to consider any potential income, estate and gift tax issues. Feel free to give us a call if you would like to start the conversation.