Estate Planning– Charitable Trusts

October 31, 2017

As we enter the final two months of the year, many people often think about their charitable intentions for the year.  Often the gifting may be simply a cash donation to a favored entity or for a preferred cause.  The charitable intent often only goes with the particular year and is a simple transaction without further ado.


But occasionally, individuals seeking to do more for a favorite organization are introduced to advanced planning ideas that give rise to a very efficient use of personal assets.   Some of these ideas include the following:


  • The first idea involves an asset currently in use by the donor. But the income generated by the asset is sufficient to satisfy the donation while the donor is alive.  The asset can then be designated to be bestowed upon the charity at the donor’s death.


Previous articles have addressed beneficiary designations and will bequests.   Those are methods without concern for current tax deductibility and they tend to be simple plans to design and implement. This article will not dwell further on such plans because our sample donor does want current tax deductibility.


  • The alternative idea to beneficiary designations or will bequests, is to devise a trust for the donor. The trust allows a most efficient use of the asset.  The asset’s income may still be used by the donor while alive and the asset can then go to the charity.  But the difference becomes important when the donor gains a current deduction for the contribution of the asset to the trust.  The deduction becomes important if the donor wishes to offset significant income for the current year.


For example, assume Joe Generous owns stock in a company that generates a dividend each year.  But Joe wishes to ensure an annual contribution to his favorite charity, Good Deeds Done.


As a way to utilize the stock’s important dividend, Joe agrees to establish a charitable trust and to contribute the stock to the trust.   The trust is then established as an irrevocable trust, meaning that Joe can never reverse his decision to donate the stock.  Upon contribution, the stock will now be held in the name of the trust, not in Joe’s name personally.


This distinction of the legal entity holding the stock is what allows for Joe to have a deduction for the current year for the entire worth of the contributed stock.


The stock will be held by the trust for the duration of the Joe’s life.   And during his life, Joe may continue to receive dividends from the stock as income.  But Joe no longer controls the stock.  The trust, and its fiduciary, the trustee, controls the stock.  The trustee will vote the shares of the stock for the company to which the stock belongs.


At Joe’s death, the trust is instructed to release the stock to Good Deeds Done, the charity.    The charity, now in control of the stock, may retain or sell the stock as it determines the best course of action.


This idea is known as a remainder charitable interest because the donor gets the first benefit from the asset and the charity gets the remainder interest in the asset, usually after the death of the donor.


  • The inversion of the charitable remainder trust is the lead charitable trust. As one might anticipate, a lead trust finds the charity receiving the first benefit from the trust.    The remainder benefit, again, often at the death of the donor, may find the asset going to a third party, perhaps heirs of the donor.


If the remainder interest does not go to a charity, no current tax deduction is permitted to the donor.  However, the asset is considered to have been removed from the donor’s final estate because it is now part of the irrevocable trust.


If you are interested in discussing these ideas further, please contact our office to set an appointment.  We look forward to seeing you and hope all is well with you until then.   Thank you.


This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.

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