5 Key Factors to Consider When Setting Up a Charitable Trust

Charitable trusts are great tools for donors who want to boost their philanthropic impact, establish a legacy, and preserve the value of their treasured assets. However, charitable trusts have risks and responsibilities that you should consider carefully.

Depending on the type of trust, you may receive a tax deduction for each distribution made to your designated charity or beneficiaries.

Tax-Efficient Giving

With the current tax reform, some may be thinking about their charitable giving and estate planning strategies. A charitable trust can be a beneficial tool in both areas.

By transferring assets into a charitable trust, donors receive a partial income tax deduction for the value of their contribution. The investments are then invested and managed by the trustee, who makes charitable donations on behalf of the trust. Donors can also “bunch” their contributions to maximize their tax benefits.

Another benefit of this type of trust is that it can preserve the value of highly appreciated assets, such as real estate or stocks, and still generate a steady income stream for beneficiaries. Additionally, it can minimize estate taxes since the assets are not considered part of the donor’s estate when they pass away. It is essential to work with a financial representative when considering this strategy. The structure of a trust can be complex, and it is crucial to understand how the various moving parts will impact your specific circumstances. This will help you determine whether it is appropriate for accomplishing your philanthropic goals.

Asset Protection

A charitable trust offers asset protection, which can be essential for those with significant assets. When you leave your support through a trust, they are not subject to future lawsuits or creditors’ claims. This can help protect your family’s wealth from excessive taxation (death or inheritance taxes), settlements against you arising from divorce or lawsuits, and political instability.

In addition, you can also add a spendthrift clause to your trust that prevents beneficiaries from squandering their share of the assets in your trust. This can be particularly beneficial if you have beneficiaries with mental or physical disabilities, addictions, or bad habits that could lead to financial ruin.

However, this is only a strategy that some should use. Since charitable trusts are irrevocable, you should only consider this option if it is genuinely what you want to do. If you are still determining whether a belief is correct for you, reach out to a financial advisor who can explain your options and choose the best way to achieve your goals.


Charitable trusts come in various forms and have different tax impacts. However, they all share one common benefit: They provide substantial protection for assets from creditors, lawsuits, and other opposers. This is especially true for high-value assets such as real estate or stocks with significant capital gains. When these assets are transferred into a charitable trust, the donor is not required to pay the capital gains tax.

The trustee will then sell the non-income-producing assets and invest the proceeds into income-producing investments. The donor will receive an income stream for a lifetime or a specified period, after which the remaining assets will be donated to the charity of the donor’s choice.

The donor may choose an annuity-style trust, which pays a fixed amount each year regardless of changes in the trust’s investment value which distributes a percentage of the trust’s current value each year. These options allow donors to tailor their payments based on their financial needs. In addition, a charitable trust is irrevocable. If you want to retain the ability to make changes, consider a donor-advised fund (DAF).

Tax-Advantaged Income

A charitable trust can be a very tax-efficient way of giving to charities. It works similarly to a tax-deferred account, such as an individual retirement or health savings account, by deferring and skipping taxes on the investments in the trust.

It also offers a significant income tax deduction when the trust is set up. This deduction is based on the fair market value of the donated assets in the trust. This feature can preserve the value of highly appreciated assets or non-income-producing property. It can also reduce estate taxes and provide a steady income stream for beneficiaries after death or the trust term ends.

Depending on the type of trust you choose, other costs may be associated with creating and maintaining it. These fees include filing reports or paying fees to the state, depending on the size of the trust and how it is structured. While these fees are typically minor, working with a knowledgeable estate planning attorney is essential when setting up a charitable trust. A mistake could have significant financial consequences.

Legacy Giving

As the name implies, legacy gifts are those made by donors after their death. They can be a donation of cash, a piece of property, or a percentage of the donor’s estate. They can also be a bequest in a will or the designation of a nonprofit as a beneficiary of retirement accounts, life insurance policies, and other financial assets. Labeling these gifts as legacy adds a decisive motivational factor to get your donors to consider including your organization in their plans.

To generate a steady income stream from legacy gifts, you can set up a charitable trust that pays out a fixed percentage of the assets each year. The payments may increase if the trust’s investments do well or decrease if they underperform. This strategy is popular among high-net-worth individuals who wish to minimize capital gains taxes and limit their estate tax liability. It also enables them to make significant donations they could not afford with their annual gifts. Educating your donors about the benefits of a charitable trust is essential so they can be informed when they discuss their estate planning options with their advisors.

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