As its name suggests, a charitable trust (“CT”) is created to fulfill a charitable purpose. The trust must be for poverty relief, for government or municipal purposes, advancement of education, religion, or health, or other purposes that are beneficial to the community. The beneficiaries of the CT should be large enough that the community would be interested in the administration of the trust. The CT must benefit a specific segment of the public, but must not name any specific or identifiable beneficiaries.
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There are two types of charitable trusts: a charitable lead trust and a charitable remainder trust. A charitable lead trust is one where the assets in the trust are first given to a charitable organization or purpose for a specific period of years determined by the trustor (person creating the trust). Once the trust expires the assets that remain will go to the beneficiaries of the trustor.
A charitable remainder trust is the opposite of a charitable lead trust. Charitable remainder trusts are irrevocable trusts. Under IRS Code §664, charitable remainder trusts can help people save for retirement, avoid capital gains and estate taxes, and decrease income tax liability if created correctly. In a charitable remainder trust, the assets are first distributed to the beneficiaries for a specific period of time. Once the time has passed the remainder of the assets will be distributed to the charitable organization or purpose specified in the trust.
Why would someone create CT? One reason is because they are great people and are doing it out of the kindness of their hearts. Maybe they had a loved one stricken by cancer or heart disease? Maybe they want to end the use of oil or nuclear weapons? They want to create a charity that is close to their heart and the CT benefits the community as a whole. Secondly, charitable trusts are a great way to save money on taxes. Tax breaks are one of the common reasons CT are so popular. With taxes increasing each year reducing taxable income becomes more and more relevant. CT’s are advantageous for both the charitable organizations and for the settlor as well.
