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Estate Planning

What Is the Purpose of a Charitable Trust?

8 min read
Unbundled Legal Help

by Unbundled Legal Help

It is common practice for people to distribute their wealth and assets among family and friends when they pass away. In some cases, you may desire to leave money behind for charitable purposes. That often leads to the question, “What is the purpose of a charitable trust?”

In addition to tax benefits, the purpose of a charitable trust is to achieve a significant benefit for a large portion of society. Since there are so many benefits that come with charitable trusts, they are highly scrutinized and must meet strict requirements to remain valid. Approved purposes include poverty alleviation, education, religion, health, and other similar purposes. 

If you intend to set up a charitable trust, it can be helpful to first consult with a proven estate planning lawyer in your area. We can connect you today with a local estate planning lawyer.

Types of Charitable Trusts

There are two types of charitable trusts - charitable lead trusts (CLT) and charitable remainder trusts (CRT). A CLT allows charities to collect income from the charitable trust for a specific number of years. Afterward, the assets in the trust go to a beneficiary that is not a charity. 

A CRT, on the other hand, is created to distribute assets to a non-charitable beneficiary throughout its lifetime. The named charity typically serves as the trustee. When the non-charitable beneficiary passes away, the charity takes the remaining assets left in the trust. 

The type of charitable trust that you set up will ultimately depend on your needs, who you desire to distribute your assets to, and how you would like it to be used. It is best to discuss with your estate lawyer which option to choose as there are different rules, requirements, and procedures for each. 

Benefits of Setting Up a Charitable Trust

There are many benefits derived from charitable trusts. Some of the most notable include tax breaks, yearly income, and flexibility. For these reasons, charitable trusts are highly scrutinized. Learn more about the benefits of a charitable trust below. 

Tax Breaks

There are certain tax breaks that you and your beneficiaries may qualify for as a result of setting up a charitable trust. A few of the more notable tax breaks for setting up this type of trust can include:

  • Income Tax Break: Depending on the value of your contribution to the trust, your life expectancy, and interest rates, you can potentially incur an income tax deduction that’s spread over five years. 
  • Estate Tax Break: If your estate is valuable enough to incur federal estate taxes, putting your assets into a trust can help you and your beneficiaries avoid them (since the assets are eventually going to charity). 
  • Capital Gains Tax Break: Selling property or assets that have increased in value since you first purchased them can incur a capital gains tax. However, if you place your assets in a charitable trust, the charity can sell your assets (without paying a capital gains tax) and you can potentially receive income from the sale. 

Income From Charitable Trusts

By setting up a charitable trust, you can potentially receive income from the trust itself. The most common methods of receiving income from a charitable trust include:

  • Fixed Annuity: Guarantors of charitable trusts have the option to set an annual income amount to be received from the trust. After the amount is set, it cannot be changed. 
  • Percentage of Assets: You can also set up a charitable trust that pays you a fixed percentage of the total worth of the charitable trust each year. It’s important to note that if the value decreases, the payout in that particular year decreases. 

What is a Charitable Purpose?

A charitable trust cannot be set up merely for financial purposes. To qualify as a charitable trust, it must have a specifically defined purpose that qualifies as charitable. The most common types of approved charitable purposes include poverty relief, education, religion, and health. Learn more about each below. 

Alleviate Poverty

Since poverty relief is an issue that all of society grapples with, it is considered a viable charitable purpose. In many cases, these types of charitable trusts provide much-needed products and services to society’s most at-risk citizens. This can come in the form of clothes, food, housing, mental health, education, etc. 

Promote Education 

Education is a concern in every state and country. The more people that are educated, the more society benefits. For this reason, charitable trusts that focus on education can make a major impact on many people. Educational support can include donating to libraries, schools, museums, or other educationally significant institutions. 

Promote Religion 

In general, charitable trusts created to support a particular religion are considered viable. This support can come in the form of funding for construction, paying wages of religious workers, and funding religious services. For the most part, the religion must be known and “rational.” Otherwise, the courts may reject the formation of a charitable trust. 

Health

A charitable trust that focuses on the promotion of good health, disease prevention, and other health-related issues (that benefit a large portion of society) will likely be approved. In many cases, these types of trusts invest in medical research, help to maintain health facilities, and encourage healthy habits. 

How Long Does a Charitable Trust Last?

Depending on the type of charitable trust you set up, it can potentially last forever. So long as the trustee can carry out the purpose of the trust and it is funded, a charitable trust can last for many generations. However, if the purpose of the trust is achieved (i.e. the eradication of HIV), then a judge can potentially redirect the funds or cancel the charitable trust. 

What is The Cy Pres Doctrine?

“Cy Pres Comme Possible” is French for “as near as possible.” The Cy Pres doctrine refers to the power of a judge to change certain provisions in a trust when/if the guarantor’s instructions diminish the power of the trustee to carry out the mission of the charitable trust. 

Additionally, the Cy Pres doctrine gives courts the authority to direct funds of the charitable trust to another charity or purpose. This can happen if it has become impossible, very difficult, or too far-fetched to achieve the original purpose of the fund. 

How to Set Up a Charitable Trust

Setting up a charitable trust can be simple if you have an in-depth understanding of estate and finance laws. If you do not, there will likely be a steep learning curve. Listed below are the general steps that you need to take to set up a charitable trust. 

  1. Consult with a proven estate planning lawyer in your area
  2. Know what type of charitable trust you would like to set up
  3. Determine the sum of assets/funds that you want to put towards the charitable trust
  4. Identify the beneficiaries of the charitable trust
  5. All documents must be drafted by a professional and signed 
  6. Decide how you would like the funds invested

While it is possible to set up a charitable trust on your own, it is not typically the best idea to do so. Any mistakes made in the formation and/or execution of a charitable trust could result in money lost and potential criminal convictions. Contact an experienced charitable trust lawyer to discuss your needs/desires before moving forward in the process. 

What if the Charitable Purpose Fails or is No Longer Necessary?

Sometimes, the charitable purpose set for the trust cannot be accomplished. In this case, a judge may use the Cy Pres doctrine. For instance, if a charitable trust is set up to fund a school, but the school closes; a judge may redirect the funds to a similar school.

Since a charitable trust is set up to advance the cause of a general issue, it is typically not difficult for a judge to find a beneficiary charity that is working towards the same societal benefit. After all, the goal is to fund a specific purpose, not one charity. 

Should I Hire an Attorney to Help Set Up My Charitable Trust?

As you can likely see, setting up a charitable trust can be complex and confusing. There are so many options, financial implications, and rules, that it can be difficult for a person not trained in estate law to successfully navigate on their own. 

A charitable trust lawyer can help you to understand the advantages and drawbacks of your options, your rights, and what is in your best interest. Working with an estate planning lawyer helps to ensure that your estate is organized in a way that benefits you as well as your beneficiaries. 

Many people believe that charitable trusts are only for the rich and cost a lot of money to set up. While the cost of a traditional estate lawyer can be high, setting up a charitable trust can benefit people in most income brackets. 

The cost of paying an attorney to help you set up a charitable trust can be as high as $7,000 or more (depending on the complexity of the trust). If the potentially high price tag turns you off, don’t worry, you can save thousands of dollars in upfront fees by hiring an unbundled attorney. 

Save Money With an Unbundled Lawyer Today

With unbundled legal services, you can save money by hiring an estate planning lawyer in your area to handle the parts of a charitable trust that are more complex, while you save money by taking care of the rest. 

Fees for unbundled estate lawyers start as low as $500 - $1500. If your charitable trust is a good fit to be unbundled, you will not have to pay thousands of dollars in upfront fees to get it set up. 

If your assets and/or charitable purpose are more complex, our network of unbundled attorneys also offers full representation at affordable rates. Before you spend thousands on setting up a charitable trust, request help and be instantly connected with an unbundled attorney in your area.

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