How to Set Up a Charitable Trust and Leave a Legacy That Gives Back

Introduction: Turning Generosity Into a Lasting Legacy

Many people want to make a difference, but giving significant amounts of money is trickier than you think. An irrevocable charitable trust is one of the most powerful ways to leave a lasting legacy, but you have to set it up properly.

In this guide, we will explain the different types of charitable trusts, how they work, and how they help you reach your legacy goals.

What Is a Charitable Trust?

A charitable trust is an irrevocable trust (legal entity) that donates assets to charitable organizations on your behalf. It also provides various tax benefits and even continuous income for you or your heirs. Like other irrevocable trusts, after you transfer your assets into a CRT or CLT, it becomes difficult to modify it. However, the IRS gives charitable deductions to qualifying charitable contributions.

There are two main types of charitable trusts. For both, you contribute to fund the trust and have the trust operate for a set number of years of the lives of the listed people.

Charitable Remainder Trust (CRT): You get income from the CRT now for a set duration of time (e.g. until your death). The donation is made later after the specific time period.

Charitable Lead Trust (CLT): You make the donation to your designated charity now, for a set duration. Inheritance happens after the set time period for the trust is over.

CLTs are generally considered to be the inverse of CRTs.

Payments to the charity or charities from your charitable trust do not have to be made all at once. The trust can distribute payments as a fixed annuity or a percentage of the trust.

Why Choose a Charitable Trust Over Other Giving Methods

You might wonder why direct donations shouldn’t be done. Of course they can be, and in some cases you may prefer that. However, why not maximize the effectiveness of your generosity and gain financial benefits as well?

Let’s go over the main reasons to choose a charitable lead or remainder trust over other methods.

Lasting impact

A one-time gift is meaningful and helps give a burst of support to your cause. However, that impact might not last. A charitable trust ensures what you believe in can be supported for years and entire generations.

Tax advantages

Charitable trusts can provide you with partial tax deductions. CRTs that are funded with cash allow you to use a charitable deduction. Generally, you are allowed to deduct up to 50% of your adjusted gross income (AGI) though you may receive a lower deduction in certain cases.

In addition, a charitable trust is a valuable way to reduce the size of your estate. You may already know that if your estate size exceeds the federal or state estate tax exemption threshold, you will need to pay estate taxes on the excess amount. By reducing your estate size using a charitable trust, you can support your beliefs while reducing your estate size.

In addition, charitable trusts can generate continuous income. Charitable remainder trusts can be annuity-based or unitrusts.

Another advantage to charitable trusts is that capital gains taxes will be deferred until the income gets distributed to the designated beneficiaries.

Flexibility

With a charitable trust, you can decide how, when, and to whom the funds are distributed. You can place a lot of conditions on the trust’s funds to ensure your money is going to a cause you believe in, even after you pass away.

A lot of people worry that CRTs lock up your money, but they are more flexible than you think. Depending on the terms you opt for, you can access the liquidity, borrow against your future trust, or sell it if you need money.

Control

An irrevocable charitable trust allows you to name trustees, manage investments, and define how gifts are to be used. Compared to wills and direct gifting, trusts offer far more legal and financial benefits over time.

One thing to remember, however, is that irrevocable trusts can be difficult to modify. For example, after you set the minimum donation or payout rate for the beneficiaries (the charities or organizations), you won’t be able to amend it.

Legacy building

Charitable trusts help ensure your name and values live on through continued charitable work over the next generations. If you want your name to be remembered for causes you believe in, charitable trusts are one of the best ways to do so.

The Two Main Types of Charitable Trusts Explained

Charitable Remainder Trust (CRT)

For a charitable remainder trust, you place assets in the trust and assign trustees to manage it. You (or another beneficiary) receive income for life or a set number of years. When the trust term ends, the remaining assets go to your chosen charity.

As long as you fund and structure the CRT properly, you can receive a significant charitable income tax deduction.

Best for: Individuals who want a steady retirement income while also being able to give a generous, future gift to charity.

Tax benefits: You get immediate charitable tax deductions and reduced capital gains tax on appreciated assets.

Charitable Lead Trust (CLT)

A charitable lead trust has the trust donate a fixed income stream to a charity for a set period. After that period is over, the remaining assets go to your heirs.

Depending on the CLT’s structure, you can gain numerous benefits such as a current income, gift, or estate tax deduction.

Best for: Families looking to reduce estate taxes while supporting charities during their lifetime.

Tax benefits: CLTs can reduce estate and gift taxes for high-net-worth individuals, mitigating the tax burden for their heirs.

Step-by-Step: How to Set Up a Charitable Trust

Consider Your Giving Goals

First you need to pick which causes or organizations you want to support. It can be a single charity or multiple organizations.

Determine whether you want to prioritize income for your family or immediate giving.

Choose the Right Type of Trust

CRTs and CLTs are drastically different. Confusing them can lead to serious problems.

CRTs are better for lifetime income, whereas CLT provides an outlet for immediate charitable giving.

Work With Professionals

An estate planning attorney can help you draft the trust seamlessly and help you with any specific concerns you may have.

Consulting with a financial advisor or accountant ensures tax efficiency and compliance. You do not want to lose out on tax benefits and gains because you didn’t fill out paperwork or understand the regulations properly.

Not sure where to start, or want a convenient first step? LegalZoom can help you begin foundational trust documents affordably before actually consulting with an attorney.

Fund the Trust

Don’t forget to fund the trust in a way you can benefit from. Common funding methods include contributing cash, stocks, real estate, or other appreciated assets. Cash funding may be preferable if you want a charitable contribution deduction. Donating appreciating assets to charities can also increase your deductions advantageously.

Consider using life insurance via an insurer like Ethos to replenish the estate or support heirs separately.

Select Trustees and Beneficiaries

The trustee is the person or entity who is going to manage your charitable trust’s investments and distributions. It is highly recommended to choose someone who is familiar with financial responsibilities who can manage the trust reliably, even if you are not there to give input.

Next, choose your chosen charities. They should be the beneficiaries and you can provide conditions for when and how they can receive donations from your trust.

Finalize and Register the Trust

Remember to review state-specific requirements for charitable trusts. These laws can impact how you need to structure or fund your charitable trust.

After you sign and notarize documents, registering the trust, the funding begins.

Tax and Financial Benefits of a Charitable Trust

Both CLTs and CRTs enable charitable giving that is structured, predictable, and legally protected.

Charitable Remainder Trusts (CRT) Tax Benefits

After setting up a CRY you can get a charitable income tax deduction. You also get avoidance or deferral of capital gains on appreciated assets, such as appreciated securities you have purchased.

The potential estate tax reduction is also useful if you have a large estate and are worried about needing to pay state- or federal-level estate taxes.

Charitable Lead Trusts (CLT) Tax Benefits

Your heirs can receive reduced gift and estate taxes, enabling them to get more of the legacy and inheritance you plan to leave for them. This tax-efficient wealth transfer is particularly valuable for those who are impacted by state- or federal-level estate taxes and inheritance taxes.

Combining a Charitable Trust with Other Estate Planning Tools

Revocable trust

Revocable living trusts can be used for general asset management that is a step above basic wills. They lack the same asset protection and tax benefits of irrevocable trusts, but if you want to improve the probate process by avoiding public records of your asset distribution, revocable trusts are useful.

Dynasty trust

Dynasty trusts can preserve wealth for future generations upon generations, but they are not allowed in every state. Alaska, Delaware, South Dakota, and Nevada are some of the most popular and beneficial states for dynasty trusts.

Life insurance

Do you think you’ve run out of tax advantages? Life insurance policies—especially permanent life—are surprisingly valuable financial tools for people with larger estates and complex legacy goals. You can get tax-advantaged gains using universal life insurance policies, such as indexed life.

Ethos is an increasingly popular life insurance company that lets you replace assets given to charity and maintain balance between philanthropy and inheritance.

Pro tip: A charitable trust can be part of a larger estate plan. It offers generosity and financial stability for your heirs.

Common Mistakes to Avoid

Choosing the wrong trust

Do not establish any irrevocable trust randomly without careful thought. The wrong type of charitable trust can hurt your legacy and cost you immensely. Be sure the pay rate, charities, and other factors are all intentionally chosen by you, and not influenced by outsiders.

Failing to get legal or tax guidance

Tax professionals can ensure you are choosing the right charitable trust type and setting it up properly. Always consult with a licensed expert for taxes, irrevocable trusts, and estate planning. Your legacy deserves such professional protection and generic guidelines can never account for any individual situation.

Not updating the trust

Trusts can be impacted when laws, finances, and charity situations change. Stay up to date so you don’t miss out on critical updates.

Naming the wrong trustee

A lot of people end up choosing a family member as the trustee because they, well, trust them. However, you need to consider that your trustee has to know how to deal with charitable assets. If they lack experience, they may end up failing to manage the charitable trust as needed.

Forgetting to communicate your intentions

Open communication with your heirs and charitable organizations can go a long way in ensuring your legacy and assets are dealt with as you intend.

Conclusion: Giving That Lives On

A charitable trust lets your generosity last for a much longer time. It benefits both your loved ones and the causes that matter most to you. The main choices are CRTs and CLTs. Let’s sum up the benefits.

Charitable Remainder Trust: Income now, donate later.

Charitable Lead Trust: Donate now, inheritance later.

Consult with a charitable donation professional for personalized counsel.