1. What is a Charitable Trust?
A charitable trust is simply a trust which is created to further some charitable cause or purpose. That of course raises the next question: what is a trust? A trust is a form of property ownership that was developed by the Court of Chancery in feudal England. In simple terms, a trust is created when one person, called the trustee, owns property or assets for the benefit of a second person or entity, called the "beneficiary." The trustee owes a duty to act in the best interests of the beneficiary with regard to the property.
Why would you want to do this? Well the reasons are complicated, but trusts have a number of unique properties, including tax advantages, privacy, and the ability to exercise some control over a gift made to an heir or other person.
2. Types of Charitable Trusts
There are many types of charitable trusts, but the two most familiar varieties are the charitable remainder trust (or unitrust), and the charitable lead trust. A charitable remainder trust allows the beneficiary (which can be the donor) to draw income from the trust over the course of his or her lifetime. When the beneficiary passes away, the remaining assets in the trust are given to one or more charities of the donor's choosing. A charitable Lead trust is essentially the reverse of this. With this type of trust, the charity receives income from the trust for the life of the donor, and the remaining assets go to the beneficiaries when the donor passes away.
3. Benefits of Charitable Trusts
Both of these varieties of charitable trust provide significant tax advantages. First, they provide an immediate tax deduction, the size of which is determined by a number of factors including the ages of the donors and beneficiaries. Second, donations of appreciated assets like stocks or real estate to these trusts are immune from capital gains tax.
The result is you can 1) take a deduction based on the total appreciated value, 2) avoid paying capital gains taxes, 3) Generate a lifetime of income, and 4) benefit charity, all in one fell swoop! As you can see, charitable trusts are truly a win-win deal.