Charitable trusts are pretty incredible, and they’re a common addition to many of our clients’ legacy plans. There are a few types, but overall, they’re invested long-term and dramatically increase the assets someone is able to give to loved ones and their favorite charitable causes. Here’s an overview of what charitable trusts are and how they work, and the pros and cons of setting up a charitable trust. 

Once a client understands the basics, their second question is often, “When should I open a charitable trust?”

First off, it’s important to note that a trust is like a box. It can be created at any time–often when someone’s creating or updating their will or revocable living trust. But that doesn’t mean it needs to be filled (funded) at the time of creation. Funding a trust can happen anytime or at multiple times during a client’s life or after it.

Funding a Charitable Trust During Life 

There are a few key reasons someone might open and fund a trust during their lifetime:

• A trust is a separate entity from someone’s personal or family finances. Charitable trusts are irrevocable—meaning they can’t be changed once they’re funded—but they can be great for harboring assets and streamlining an estate.
• When the trust is funded, a donor gets a charitable tax deduction. When appreciated, pre-tax assets are used to fund the trust, and capital gains tax is also bypassed, so it’s a win-win tax-wise. 
• A charitable remainder trust can create predictable income for a donor and/or their loved one(s) while also teeing up an eventual, significant gift to charity.
• On the flip side, a charitable lead trust automates giving to charity while eventually reverting assets back to the donor’s loved one(s) free of tax.

What kinds of assets are best for funding a charitable trust during life?

Appreciated non-cash assets are great for funding a trust because they won’t trigger capital gains tax if they’re gifted to the administrating foundation before a sale. Cash or business-related gifts—crops, livestock, or machinery—will decrease someone’s taxable income for the year. Here are some examples of assets that are great for funding a charitable trust during life:

• Art
• Business Interest (S-Corp)
• Cash
• Collectibles
• Crops
• Livestock
• Machinery
• Patents/copyrights
• Real estate
• Stock (Private or public)
• Virtual Currency

Funding a Testamentary Charitable Trust

There are some distinct reasons someone might set up a testamentary charitable trust. For example, they create the trust entity along with their will or estate plan, but it won’t actually be funded at all or become fully funded until their death. Here are the top reasons for clients to include a charitable trust in their estate or legacy plan:

• A charitable trust is an excellent tool for incorporating regular, intentional giving to family and charity into an estate plan. 
• Assets stay accessible to someone for the rest of their life, which is especially nice if someone needs access to retirement funds. Keep in mind that Medicare has a 5-year Look Back Period, and this route will not protect assets from the cost of long-term care, while immediate funding of a charitable trust will.
• A charitable remainder trust is often funded with pre-tax retirement assets. The trust disburses assets to family over time instead of in a lump sum, often bringing heirs “down a bracket” and eliminating significant income tax.
• A charitable lead trust can be an incredible tax mitigation tool for the estate tax itself. This is why CLTs are more commonly used in high-net-worth estates that need to consider the federal and/or state estate tax thresholds.

What kinds of assets are best for funding a charitable trust during life?

Any assets may be directed into a testamentary trust, but the most impactful are ones that will likely appreciate significantly later in someone’s life (in the case of a CLT) or qualified or pre-tax assets (in the case of a CRT). They’ll be able to sit in someone’s estate and increase in value while allowing the estate (and, by extension, the heirs) to eventually bypass capital gains tax and/or estate tax when the assets are transferred at someone’s death.

Here are some examples:

• Cash
• Marketable Securities
• Real Estate
• Business Interests
• Life insurance 
• IRA, 401k/403b, Annuity (in a CRT only)