New York Estate Planning & Elder Law Blog
An Overview
A trust is established by an individual, referred to as a settlor, who seeks to have their property held for the benefit of another party. When it comes to charitable trusts, the settlor intends to have their property or assets transferred for the benefit of one or more charities.
Charitable ‘split interest’ trusts have a number of benefits, not only because they allow the settlor to give to both charitable and noncharitable beneficiaries, but they also reduce the amount paid in estate taxes, they eliminate capital gains, provide an income tax deduction and also provide for and benefit charitable organizations versus paying the IRS. There are two different kinds of charitable ’split interest’ trusts available, which differ depending on the property or assets you seek to donate to the charity, how you want the property to be distributed, as well as any wealth preservation measures you seek to have followed.
Charitable Remainder Trust
Charitable Remainder Trusts allows a settlor to donate or covert highly appreciated property or assets into an irrevocable trust that benefits a noncharitable beneficiary, as well as a charitable beneficiary, at different times. Once the property is transferred into the trust, it no longer is an asset of the estate, thus, estate taxes will no longer need to be to be paid on the property when the settlor passes.
After the trust is established, the settlor can either make an annual payout to his or herself or to another noncharitable beneficiary for the term of the trust, the time period for which is up to the settlor; either measured by a lifetime of the settlor or another person, or up to a 20 year term if not measured by life, and once that time line expires, the property is distributed to the charity chosen. Many individuals chose this type of trust because they can convert property that has appreciated to a greater extent without having to pay capital gains, which leaves more money for both the noncharitable beneficiary as well as the charitable remainder beneficiary.
Charitable Lead Trust
Charitable Lead Trusts are very similar to Charitable Remainder Trusts in that they have split interests for both noncharitable beneficiaries as well as charitable beneficiaries, but they do not have tax exempt status. The interests in this trust are directly opposite of the Charitable Remainder Trust; during the predetermined term date set out by the settlor, a charitable beneficiary first receives the income interest, and upon the completion of the term set out in the trust document, the assets then vest in the noncharitable beneficiary. There are various benefits to this type of trust as well; assets appreciate outside of the donor’s taxable estate, the settlor’s estate retains ownership of the assets while providing charitable income for the beneficiary, and assets are taxed at a reduced value by the IRS.