Charitable Trusts: How and why

Many people, when they think of their legacy, have charitable intent. They want some or all of their estate to pass to a charitable organization when they die. The government favors this intent, and estate planning has created several ways to fulfill it using charitable trusts.

What is a “Charitable Organization”?

A trust is “charitable”, generally, if it is created to promote health, address poverty, support religion, promote education, or perform a quasi-governmental act (such as maintaining a beach or park). Again, generally speaking, a charity does not exist to benefit an individual – they exist to further public good.

Notably, what a state considers a charitable organization may not be what the federal government does. For example, in Minnesota, a lobbying group can be a charitable organization. Under federal law, a charitable organization cannot attempt to influence legislation as a substantial part of its activities.

Sometimes a charity named as beneficiary to a trust ceases to exist. Or an attempted gift of a charity violates public policy. In that case, a Court can reform the trust under the “cy pres” doctrine. It can change the named beneficiary to something generally acceptable.

Why do people give to Charitable Organizations?

Some people are charitably minded when they plan for their legacy. This may be the primary reason people leave money to charity, but for estate planning, this isn't the only reason. Donations to charity can reduce the value of an estate to below a certain tax bracket. Or, with the advent of the SECURE Act, they can be used to create a “quasi-stretch” trust. (The SECURE Act has a loophole – it limits a stretch trust in many situations. Unless, however, a charity is the residual beneficiary. Then a trust can pay an annuity or as a unitrust for a longer period of time than normally allowed.)

How can trusts be used for charitable giving?

There are as many types of charitable trusts as one can imagine. There are essentially nine split interest vehicles that the IRS recognizes for charitable giving. Split interest means that at different times the trust benefits different beneficiaries. The trusts  can be organized as follows:

Level 1: Relegate Beneficiaries

First we determine what type of beneficiary receives income when:

Charitable Lead Trust (CLT): This is a trust where a charity receives an income during the life of the trust. Then, a non-charitable beneficiary receives the remaining assets at the end of the trust's life.

Charitable Remainder Trust (CRT): This is the reverse of a CLT. A non-charitable beneficiary receives income from the trust during their life. At their death, a charitable beneficiary receives the remainder.

Level 2: Annuity v. Unitrust

Next we determine whether the trust pays an annuity during the life of the trust or is a unitrust. An annuity trust pays out fixed amounts during the life of the trust. A unitrust pays a fixes percentage of the net fair market value of the trust assets.

Charitable Lead Annuity Trust (CLAT): A charitable lead trust that pays a fixed amount of income during the life of the trust.

Charitable Lead Unitrust (CLUT): A charitable lead trust that pays a percentage of the net fair market value of the trust assets.

Charitable Remainder Annuity Trust (CRAT): A charitable remainder trust that pays a fixed amount of income during the life of the trust.

Charitable Remainder Unitrust (CRUT): A charitable lead trust that pays a percentage of the net fair market value of the trust assets.

Level 3: Income Basis

Third, there are two additional types of charitable remainder unitrusts.

Net Income Charitable Remainder Unitrust (NICRUT): This is a CRUT where it is the lesser of either (i) the unitrust amount or (ii) the trust's net income that is paid out annually.

Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT): This is a NICRUT except that when there is a deficiency in the distribution (less than the fair market percentage), it must be repaid when income allows for it.

In addition to the above, the IRS recognizes a catchall “Complex” trust. This trust can be a hybrid of any of the above, or something else altogether. And, of course, there is nothing stopping a direct lump sum donation to a charity.

Takeaway

There are many vehicles with which to give to charitable organizations in your estate. With a little creativity, you can find the vehicle that fits your wishes. If you are charitably minded and want to involve giving in your estate plan, contact Signature law for a free consultation to discuss what options may fit your needs.