Should you set up a charitable trust? | Aging

If you have extra funds and want to support a cause, a charitable trust might be an option. “A charitable trust can only be set up to donate money to a charitable cause, but it is also a valuable way to pass assets to beneficiaries without the burden of estate or gift tax,” says Anthony Martin, CEO of Reno, Nevada-based Choice Mutual. Understanding the basics of how charitable trusts work can be helpful when evaluating whether a trust is right for your financial plan.

When considering creating a charitable trust, you will want to:

A charitable trust can be set up in different ways and have different tax implications. Two common types are the charitable remainder trust and the charitable master trust. There are also variations within these categories.

If you create a charitable remainder trust, you will first fund it with cash or other assets. The trust pays a stream of income to your family members or beneficiaries over their lifetime or for a specified period of time. On death or when the period expires, the remaining assets go to the charity.

In a charitable master trust, payments from the trust will first be sent to the charity and the remainder will be transferred to the beneficiary at the end of the trust term. This type of trust is often funded as part of an estate plan and can reduce taxes owed by the beneficiary. “The estate gets a charitable deduction and the beneficiaries get the rest,” says Joanne Burke, founder of Birch Street Financial Advisors in Vienna, Virginia.

When deciding which type of trust to get, it can be helpful to speak with a financial advisor to compare the choices. “It’s important to understand aspects of each and how the money will be paid out over the life of the trust, as well as what happens when the trust has reached its limit,” says Martin.

If you are passionate about a cause, leaving a charitable trust can be a way to make an impact. “A charitable trust can allow a donor to leave behind everything they have acquired, knowing that it will go to a good cause,” says Martin. Your legacy will continue with the organization and among those who are aware of the trust.

Another advantage of charitable trusts is a lower tax burden for you and your beneficiaries. “It’s a great advantage if the donor doesn’t want a heavy upfront tax impact on their beneficiaries, or if there are multiple assets that a donor wants to be able to pass on to subsequent generations without that dreaded tax burden,” Martin says. . “It can also help reduce the value of your estate, once again easing the tax burden on your loved ones,” says Martin.

If you’re concerned about a sale that will result in high taxes, a charitable trust can help. “Often a large capital gain, say a gain of $250,000 or more, is enough taxable gain that can cause many investors to pause before selling the asset,” says Barry Spencer, co-creator of Wealth With No Regrets at Alpharetta. , Georgia. “High-gain common assets include real estate, individual stocks, or closely held companies, to name a few.” By creating a trust, you can transfer the high gain asset into the charitable trust. The move makes the trust the owner of the asset. “Once the high-gain asset is inside the trust, the investor can sell the asset, avoiding the capital gain at the time of sale,” says Spencer.

There are costs associated with establishing and managing a trust. Additionally, trusts tend to be irrevocable, which means that if your financial situation changes, it could be difficult to access the funds. “Once trust is established, it can’t be changed very easily,” says Spencer. It is also possible that family members or other heirs may disagree with your decision to donate your assets to a particular cause, which can create family tensions.

You will want to ensure that the benefits associated with the charitable trust outweigh the management costs involved. Also, assess your situation to determine if you have funds to spare. “This money should be considered ‘surplus’ and not ‘essential’ money to live on,” says Spencer. You will want your debts paid off and be certain that if your financial situation fluctuates over the next few years, you will not need to access the assets of the trust.

The exact amount to place in a trust will vary depending on your circumstances and personal preferences. Talking to an advisor and reviewing your overall financial plan can be the best place to start when deciding if a charitable trust is right for you, your loved ones, and your charity of choice.