Charitable giving has long been a part of the financial planning process. And it’s important to remember that giving back extends beyond simply writing a check or donating old clothing. Charitable trusts are one of the many alternative ways to use investing for a greater good.
While setting up a charitable trust may seem daunting, there are some features that make these trusts particularly appealing for certain individuals and families.
What is a Charitable Trust?
First, a charitable trust is a collection of assets—including cash, appreciable assets, real estate, art, stocks and more—committed to support one or many charitable causes or organizations. In many instances, these trusts offer a solution for individuals or families looking to contribute higher-dollar donations, while also benefiting from potential tax savings related to long-term capital gains taxes on appreciated assets and lower estate taxes after death.
Charitable trusts come in many shapes and sizes, so research and education are critical before deciding which trust is right for you. While many trusts may potentially provide tax benefits—either through income tax deductions, reduced estate taxes or reduced gift taxes—certain trusts can offer an additional feature for individuals or families looking to generate income.
Before settling on a charitable trust, it’s important to evaluate your overall financial picture and consider factors such as whether you have children and how much (if any) you hold in interest-generating investments. Just as for all investment accounts, charitable trusts should always be considered in the context of beneficiaries and holistic estate planning.
Charitable trusts can be broken down into two key types: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).
Charitable Remainder Trusts include unitrusts (paying a percentage of the current value of assets annually) and annuity trusts (paying a fixed amount annually). With CRTs, the beneficiary receives income on the trust’s assets for the trust’s term. At end of term, the charitable organization receives the trust’s core assets, including appreciated value. Charitable gift annuities are another income-generating charitable donation vehicle.
Charitable Lead Trusts function the opposite way. Income generated from the assets of a CLT is distributed to charities at regular intervals throughout the life of a trust. The core assets are returned to a non-charitable beneficiary (such as an individual or family) at the end of a trust’s life.
Other types of charitable giving include donor-advised funds and private foundations—both of which support public charities and offer tax benefits on contributions.
When it comes to limiting tax liabilities or benefiting from the regular, passive income streams CRTs may provide, timing is critical. In the same way clothing and financial donations made during the holidays allow individuals to realize the tax benefits the following spring when filing taxes, setting up a charitable trust by December 31 can help reduce an individual’s personal income tax liability for the full tax year.
Consult the Experts
Though certain charitable trusts, including charitable gift annuities, can be set up directly through your wealth advisor, for others, it’s important to consult your lawyer and tax planning professional to ensure you’re considering all potential effects on your taxes and estate. Additionally, there are many types of charitable trusts, so it’s important to work closely with your financial, tax and estate advisors to ensure you’re choosing the best fit for your needs and passions.
Ultimately, charitable trusts can be an effective way to give back to your favorite nonprofit or charitable organization for years to come, while at the same time offering potential financial benefits to you, your family and your estate.
TD Private Client Group, a unit of TD Wealth®, provides clients access to bank and non-bank products and services, including securities and investment advisory products, but not including tax or legal advice. Member FINRA/SIPC (TDPCW). TD Asset Management USA, Inc. and Epoch Investment Partners, Inc. are federally registered investment advisers that provide investment management services. TD Bank, TDPCW, TDAM USA, and Epoch are affiliates. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Equal Housing Lender.
David Glickman has 25 years of wealth management experience working with high net worth families on taxation, charitable planning, personal trust and estate planning. As a Wealth Market Leader, he works with a team of investment advisors, planners and trust professionals. TDBank.com.