There are several types of charitable trusts available, and the type of trust used depends on a person’s philanthropic intent. Charitable trusts can be combination trusts that involve charities and individuals, or purely charitable trusts that do not benefit an individual.
Charitable Remainder Trusts
If a charitable trust grantor wants to continue to receive income for his lifetime from the trust assets with the trust principal distributing to charity upon his death, then the charitable remainder trust is the appropriate trust. A charitable remainder trust grantor determines the level of income distributed, based on Internal Revenue Service guidelines, and receives the formula calculated income for his lifetime. Upon the death of the grantor, the charitable remainder trust distributes the principal to the charities the grantor has named in the trust.
Charitable Lead Trusts
A grantor who wants current distributions to charity but the trust principal distributed to family members or other individuals would use a charitable lead trust. The charitable lead trust distributes current income to the charities named in the trust agreement for a specific term, and distributes the trust principal to the individuals named by the trust grantor at the end of the trust term.
A person with a purely philanthropic intent would use a private foundation that distributes only to charity. Unless otherwise specified by the trust grantor, private foundations do not have to terminate and distribute trust principal. The grantor of a private foundation names the charities to receive the trust income, which would distribute to the charity in perpetuity.
Charitable trusts have different tax benefits to the grantor, such as using low-cost basis stock to fund the trusts. Low-cost basis stock can carry a hefty tax burden if sold by the grantor, but does not have the same tax burden in a charitable trust. There are numerous ways for a grantor to tax-leverage charitable trusts, so it is prudent for the grantor to consult a tax advisor when establishing charitable trusts.
Mary Frazier began writing in 2011 for various websites and has over 20 years of experience as a bank vice president and senior trust officer. Frazier is a Certified Trust and Financial Advisor, holds a Bachelor of Arts in economics from the University of North Florida and holds a Master of Science in finance from the College for Financial Planning.