Charitable Trust - United States

United States

Charitable trusts may be set up inter vivos, during a donor's life, or as a part of a trust or will at death, as testamentary. US charitable trusts vary primarily in two factors: firstly whether the charity is paid first (and the remainder, after trust termination, goes to beneficiaries, such as heirs or back to the donor) – a "charitable lead trust", or whether the charity is paid last (after termination of the trust, after other beneficiaries have received payments) – a "charitable remainder trust"; and secondly whether the payments are a fixed amount "annuity trust", or a percentage of principle "unitrust".

Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates. These "split interest" trusts are defined in §664 of the Internal Revenue Code of 1986 as amended and are normally tax-exempt. A section 664 trust makes its payments, either of a fixed amount (charitable remainder annuity trust §664(d)(1)(D)) or a percentage of trust principal (charitable remainder unitrust), to whomever the donor chooses to receive income. Normally, the donor may claim a charitable income tax deduction, and may not have to pay an immediate capital gains tax when the charitable remainder trust disposes of the appreciated asset and purchases other property as it diversifies its portfolio of trust property. At the end of the trust term, which may be based on either lives or a term of years, the charity receives whatever amount is left in the trust. Charitable remainder unitrusts (§664(d)(2)(D)- paying a fixed percentage) provide some flexibility in the distribution of income, and may be helpful in retirement planning, while charitable remainder annuity trusts paying a fixed dollar amount are more rigid and usually appeal to much older donors unconcerned about inflation's impact on income distributions who are using cash or marketable securities to fund the trust.

Parents who have a child with a disability should ensure that the inheritance they leave for their child does not affect their child's eligibility for social assistance programs. A Henson trust can be useful to ensure this.

Charitable lead trusts make payments, either of a fixed amount (charitable lead annuity trust) or a percentage of trust principal (charitable lead unitrust), to charity during its term. At the end of the trust term, the remainder can either go back to the donor or to heirs named by the donor. The donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift, depending on the type of a charitable lead trust. Generally, a non-grantor lead trust does not generate a current income tax deduction, but it eliminates the asset (or part of the asset’s value) from the donor’s estate.

If the trust has qualified under laws such as Internal Revenue Code section 501(c), donations to the trust may be deductible to an individual taxpayer or corporate donor.