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Charitable Trusts in California

Trusts, Trust Administration

WHAT IS A CHARITABLE TRUST?

Sometimes people have charitable intent and desire to give their assets to a charity. The law favors charitable trusts, sometimes called public trusts, by according them certain privileges, such as an advantageous tax status.

BENEFITS OF CHARITABLE TRUSTS 

  • You are able to donate generously to the charities of your choice while receiving a tax break for yourself and your heirs by creating a charitable remainder trust (CRT)
  • The main advantage of a charitable trust is that it can be a powerful tool for asset protection.
  • In this type of trust, the grantor or trust creator can act as a trustee, managing or investing the property so it produces income for you. 
  • The charitable remainder trust pays you (or whoever you designate) for a specific time period determined by you. After your death, or at the end of the specified period, the remaining assets in the CRT goes to the charity. No federal tax is imposed on the property donated to charity. 
  • Tax deductions may be spread over five years for the value of your gift. 
  • If your property has appreciated in value, the charitable trust may allow you to turn that increase into cash without paying capital gains tax on the gain. Charity can sell assets that don’t produce income in a charitable trust in order to buy income-producing assets — but since charities don’t pay capital gains tax, the proceeds remain in the trust tax-free. 
  • It is possible to choose to collect a constant income from your trust each year. Alternately, you may choose to set payments as a percentage of the current value of the trust assets.

WHO CAN SET UP A CHARITABLE TRUST IN CALIFORNIA?

Anyone who has charitable intent and assets that they want to leave to a charity. 

TYPES OF CHARITABLE TRUSTS

There are different types of charitable trusts you can set up in California – charitable remainder trusts and charitable lead trusts.

CHARITABLE REMAINDER TRUSTS

  • These types of charitable trusts allow you to contribute charitable gifts, receive certain tax benefits, and create an income stream for yourself or the beneficiaries you designate.
  • Commonly referred to as CRTs, charitable remainder trusts provide income distribution to beneficiaries for life or a term of years not exceeding twenty. This type of charitable trust also includes an irrevocable remainder interest paid to a charity.
  • This means that a certain portion of the income generated by the charitable remainder trust is paid to one or more beneficiaries, while the remainder is donated to a charitable organization.
  • A properly established CRT allows you to receive money from appreciated assets without incurring capital gains tax. Furthermore, you can receive income tax deductions based on the amount you donate to a charitable organization.
  • CRTs also come in different variants, including charitable remainder unitrusts, charitable remainder annuity trusts, and net-income method charitable remainder unitrusts.

CHARITABLE REMAINDER UNITRUSTS

  • With charitable remainder unitrusts, the designated beneficiaries will receive a percentage of the trust’s assets every year. The value of the trust is reappraised annually, with the beneficiaries receiving a set portion of it. According to the Internal Revenue Service, beneficiaries must receive at least 5% of the value of the charitable trust.
  • Essentially, the beneficiaries will receive more if the trust performs exceptionally well and will receive less if the trust underperforms. The strategy works well if you are not relying on trust payments as your primary source of income.

CHARITABLE REMAINDER FIXED ANNUITY TRUSTS

  • With these charitable trusts, the beneficiaries receive a fixed dollar amount or an annuity from the trust every year. Even if the trust’s income for the year is less than anticipated, the beneficiaries will still receive the same amount.
  • One downside with charitable remainder fixed annuity trusts is that you can’t change the annuity once you create the trust. Similarly, if the trust’s income is higher than anticipated, the beneficiaries will not receive more.
  • Though you can make the payments as high as you want, we always recommend being realistic. Keep in mind that the higher the payments, the lower the income tax deduction. Also, high payments can diminish the principal balance, meaning you will have less income to donate to the charity.

CHARITABLE LEAD TRUST

  • In some ways, the charitable lead trust is the reverse of the charitable remainder trust.
  • With a charitable lead trust, the trust will first give a set amount of its income to a charitable organization. The remainder will then either go to the grantor’s beneficiaries or remain in the trust.
  • Charitable lead trusts are an excellent strategy if you do not need a set amount of extra income and if your primary goal is donating money to a charitable organization.

IRREVOCABLE NATURE OF CHARITABLE TRUSTS

Charitable trusts cannot be modified and come in many types of packages. An Irrevocable Charitable Trust is not sold or liquidated, therefore no tax will be due.

With an Irrevocable Charitable Trust, the trust is set up to pay the trust beneficiary income that the trust beneficiary agrees to. 

In most cases, the Charitable Trust can sell the property, but they won’t need to pay taxes. An individual receives a charitable tax deduction based on a number of factors such as their life expectancy, the value of the property, and the required interest payments to them.

COMPLEXITIES OF OWNING A CHARITABLE TRUST 

There are a number of complications that arise in administering a charitable trust when there are multiple beneficiaries. If a mistake is made, the consequences can be severe. 

The trustee could face personal liability and/or a penalty equal to 200% of the value of the trust. This can happen when documents or procedures are not followed correctly from the very beginning.

Consider what kind of legacy you want to leave and the values you want to impart to future generations. If you take into account the first issue, you’ll be able to determine what sort of charitable giving you would like to make, and taking into account the second issue will help guide your descendants and preserve your family name. 

You then need to decide which type of trust best fits your legacy and values. In California, you can choose between charitable lead and charitable remainder trusts. 

When the trust term ends, your charities will receive the trust assets. You as the donor will, however, receive the trust income until the trust terminates. Having a bit of financial security of your own while helping others in your community can be very rewarding.

 

SET UP AN ERROR-FREE CHARITABLE TRUST WITH OUR EXPERIENCED ATTORNEYS 

Need income for an older person? Are you concerned about the unwise management of your assets? Do you have tax concerns? These issues, as well as others, can be addressed by a charitable trust.

While a charitable trust may make life easy for your family, an inexperienced attorney can leave them with many liabilities. The choice of an attorney becomes even more crucial here.

The process of setting up a California charitable trust is not only time-consuming and expensive, but also requires special expertise in advanced estate planning. 

Call a California Trust attorney at Klosek Law Offices, a leading provider of philanthropic services. The California legal team at our firm has established more than 100 California charitable trusts — so we certainly know what we are doing. Call us today and let’s plan your estate together.