Eric Tolbert, CLU ChFC

Eric Tolbert and Associates, A Financial Advisory Practice of Ameriprise Financial Services, Inc.

Eric's Profile Page

Ask Eric a Question

A Closer Look at Charitable Trusts

Discuss this Article
No responses yet, be the first...

Have you ever given a gift that benefited you as well as the recipient? Perhaps you treated someone to a concert, special dinner or class and you enjoyed the experience as much as your guest did. Similarly, when you give a financial gift through a charitable trust you enjoy a range of benefits; the trust's non-charitable beneficiaries gain too.

What is a charitable trust?

A charitable trust is an irrevocable trust that involves two distinct beneficiaries: charitable and non-charitable (such as yourself, your spouse or your children). One beneficiary receives an income stream from the donated trust property for a specified period of time and the other beneficiary receives the remaining property held in the trust after this period ends. The type of charitable trust establishes which beneficiary receives income and which one receives the assets.

Types of charitable trusts

Charitable Remainder Trust (CRT) - With a CRT, the trust pays out income to the non-charitable income recipient every year for the term of the trust, and then remaining assets pass to the charity.

Charitable Lead Trust (CLT) - A charitable Lead Trust is the reverse of a Charitable Reminder Trust. In a CLT the trust pays income to charity every year for the term of the trust and then the remaining assets pass to the non-charitable beneficiary.

Charitable trusts provide unique giving opportunities because they allow you to donate to the charities of your choice in a tax-savvy way. If you established a charitable trust in your will (called a testamentary trust or trust under will), you may receive an estate-tax charitable deduction. However, implementing a charitable trust during life provides tax advantages as well.

Benefits and considerations

When determining if a charitable trust is a good option for you, consider these strengths:

Delivers income tax advantages - The donor receives an immediate income tax charitable deduction that can be claimed during the current year or over the ensuing five years.
Generates an income stream - Charitable trusts distribute annual income to the designated income recipients, whether they are charities or people. This enables you to put your assets to work to financially benefit a favorite organization or cause, yourself or another person.
Offers an alternative for highly appreciated assets - Once assets are transferred to a Charitable Reminder Trust, the trustee can sell them without immediate capital gains taxes. By delaying the impact of capital gains taxes, the transfer enables full use of the assets to investment. The trustee can diversify and invest the trust assets to achieve specific goals.
Creates a financial legacy - Whether the charity receives an income stream for a period of years or a lump-sum gift at the end of the trust term, your donation will make a difference.
Streamlines estate administration - In most instances, assets placed in charitable trusts are excluded from your estate. This can simplify estate settlement and may reduce estate settlement costs after death.

Before pursuing a charitable trust, consider these issues:

Requires an irreversible commitment - Once you decided to donate a portion of your assets through a Charitable Reminder Trust, these assets will never be available for your heirs. One option is to replace this wealth with Life Insurance. The policy proceeds are distributed free of income tax to your heirs, thus replacing the assets that are otherwise being given to charity. An insurance policy may be owned by a different trust if this strategy fits with your overall estate plan.
Involves complex administration - While a charitable trust offers many benefits, it is more complicated to administer than an outright gift to charity. Careful selection of a competent trustee who has the expertise to administer your trust appropriately is crucial to the success of your plan.
Taxes may be due on income payouts - Individual income recipients will owe income taxes on any payments they receive from a CRT. There is no gift tax if the donor or the donor's spouse is the income recipient of a CRT. However, there are possible gift taxes with a CLT or if someone else is the income recipient of a CRT.

Is a charitable trust right for you?

When you incorporate charitable giving into your financial planning process, you lay the foundation for making the most of your gifts. Although generosity is always commendable, haphazard giving can potentially diminish the effectiveness and impact of your contributions. Charitable trusts give you the opportunity to leave a meaningful legacy to charity and enjoy many financial and family benefits.

Who's Involved In a charitable trust?

Charity - The charitable organizations receive a financial benefit from the trust. Depending on the type of charitable trust, the charity can be an income or a remainder beneficiary. The donor chooses the charity and may name more than one.

Trustee -The trustee carries out the terms of the trust, invests the assets and protects the interests of both the income recipients and remainder beneficiaries. The trustee has a dual fiduciary responsibility: to generate income and preserve the trust assets.

Donors (also known as grantors) - Donors work with their attorneys and tax advisors to establish their trusts, make the gifts and use their income tax deductions.

Beneficiaries - The income recipients receive income under the terms of a trust. The remainder beneficiaries receive the trust assets when the trust ends. The donor names the beneficiaries and may choose more than one.

Neither Ameriprise Personal Trust Services nor Ameriprise financial advisors are authorized to give legal or tax advice that goes beyond the scope of its fiduciary responsibilities associated with serving as investment agent or trustee. For legal or tax matters that go beyond these roles, clients will need to consult their own legal and/or tax advisors.

Financial advisory services and investments available through Ameriprise Financial Services, Inc., Member NASD and SIPC. Securities and mutual funds available through Ameriprise Financial Services, Inc. are not deposits or obligations of, nor guaranteed or insured by the FDIC nor any other federal or state agency and may involve investment risk, including loss of principal. Ameriprise Financial Services, Inc. is part of Ameriprise Financial, Inc.

Ameriprise Bank, FSB, is separate from Ameriprise Financial Services, Inc. and is not a broker-dealer. Ameriprise Financial Services, Inc. and Ameriprise Bank, FSB are subsidiaries of Ameriprise Financial, Inc.

404165 A (2/07)