Charitable trusts offer the benefit of producing income for the grantor's designated beneficiaries while also making this wacky world a better place. For a trust to be charitable, the gift must be given to a charitable organization. While this may seem obvious, it's important to understand that the state of California ultimately says what is and isn't a charity, and in fact, the Attorney General’s Office must be notified in situations affecting charitable trusts.
Long story short, it's important that you do it right when you decide to create a charitable trust. There are two popular charitable trust types, and depending on your income needs, one may be more appropriate for you than the other.
Type 1: The Charitable Lead Trust
A charitable lead trust gives a predetermined amount of trust income to the grantor's chosen non-profit beneficiaries for a fixed term. After the term ends, the leftover income either stays in the trust or is paid out to other beneficiaries as specified in the trust agreement. These beneficiaries are usually some combination of the grantor and their family.
Pros: The charitable lead trust will reduce estate taxes and gift taxes in some circumstances. Trust assets can appreciate over time before vesting in the grantor or their heirs.
Cons: The charitable lead trust isn't income tax-exempt and doesn't provide immediate tax benefits, and the trust is irrevocable. Charitable lead trusts can be complex and require ongoing attention.
Type 2: The Charitable Remainder Trust
A charitable remainder trust pays a predetermined amount of trust income to individual beneficiaries first, and the remainderis then paid to the non-profits of the grantor's choosing.
Pros: The charitable remainder trust offers immediate tax benefits. Grantors or their designated non-charity beneficiaries receive a steady income for a specified term or during the course of their life.
Cons: Requires contributions large enough to benefit the charity after non-charity beneficiaries are paid. The trust is irrevocable.
Deciding on the Right Type of Charitable Trust
If done right, both types of charitable trusts allow a grantor to capitalize on investments without incurring onerous tax obligations. Simultaneously, these trusts serve a higher purpose and provide a unique opportunity for grantors to give back.
When committing to a charitable trust, it's important that an experienced California estate planning attorney guide you in both the trust creation and its maintenance.
