Charitable Trusts

Donors gain an immediate tax deduction, reduce their estate tax liability, and increase the wealth passed on to heirs. A charitable trust is an asset placed in trust that each year pays a specific sum of money or a fixed percentage of the trust to one or more beneficiaries.

There are two main types of charitable trusts: a charitable remainder trust and a charitable lead trust.

Charitable Remainder Trust Donors gain an immediate tax deduction, reduce their estate tax liability, and increase the wealth passed on to heirs.

A Charitable Remainder Trust provides for a specified distribution at least annually to one or more beneficiaries, at least one of which is not a charity.

For example, a charitable remainder trust can be established to pay the donor (or another beneficiary, such as a spouse or child) an income stream for as long as the donor or other beneficiary lives, whereupon the remainder of the trust will be paid to Domestic Violence Solutions.

A charitable Remainder Trust offers three primary benefits:

  • A lifetime income.
    When you establish a trust, you direct that a specified sum or a certain percentage of the trust be paid to you (and/or other beneficiaries) each year. Most donors designate a sum or a percentage equivalent to 5% to 8% of the value of the trust.
  • A charitable income tax deduction.
    Although Domestic Violence Solutions will receive no benefit from your charitable remainder trust until the end of the term of income payments, you - the donor - can take an immediate charitable income tax deduction for the present value of the deferred charitable interest.
  • Avoidance of capital gains tax.
    When you fund a charitable remainder trust with appreciated property, you incur no capital gains tax liability, either when you transfer the property to the trust or when the property is sold by the trustee.

Mrs. Brown, who is 65, owns a piece of property that she bought for $25,000 and that has since appreciated to $150,000. If Mrs. Brown sold the property, she would incur costs of approximately $34,500, taking into account selling costs, commissions, and capital gains tax. However, if Mrs. Brown transfers the property to a charitable remainder trust that will pay her 7 percent per year (percents vary based on current interest rates), she will receive an income stream of $10,000 annually and also gain a substantial income tax deduction for her charitable gift.

Assuming that Mrs. Brown's charitable deduction results in a federal income tax savings of $20,000 and that she invests this savings at 5 percent, her total annual income will be $11,500 ($10,500 + $1,000) - nearly $5,725 more each year than if she sold the property and invested the after-tax proceeds.

What's more, if Domestic Violence Solutions were the beneficiary of the charitable remainder of her trust, DVS would receive the principal of the trust upon Mrs. Brown's death.

Charitable Lead Trust

A Charitable Lead Trust is the inverse of a charitable remainder trust, in that it leads with a payment stream to charity and, at the end of the trust's term, confers the remainder of the trust on a non-charitable beneficiary, such as the grantor. Charitable lead trusts are typically created when interest rates are low, increasing the present value of the charitable donation, while decreasing the taxable value of the remainder that goes to heirs. Donors gain an immediate tax deduction, reduce their estate tax liability, and increase the wealth passed on to heirs. Plus, Domestic Violence Solutions, as your charitable beneficiary, benefits immediately.