Charitable Trust – Basic Requirements Charitable trusts benefit society at large (or at least a segment of society) rather than an individual or group of individuals. The trust must have a “charitable purpose.” Charitable trusts are, be definition, irrevocable. A charitable trust cannot define an individual or group of individuals that it benefits. It may eventually end up benefitting a person or small group; it just cannot be initially set up to do so

Charitable Purpose The trust document should specify the charitable purpose or purposes. Unlike other trusts or business entities what leave purposes broad or open ended. Charitable purposes are broad and include: Relief of poverty Advancing education Even politically biased education Working to improve health of people; including medical research Advancing religious institutions A trust that may only give assets to another charitable organization can also qualify as an irrevocable trust.

Benefits of a Charitable Trust Gifts to a charitable trust are exempt from gift and estate taxes. Contributions to a charitable trust are income tax deductible. Assuming the trust first gets tax exempt 501(c) status from the IRS A charitable trust does pay income tax if it makes money unrelated to its normal charitable activities Called “unrelated business income tax” or “UBIT” Charitable trusts are exempt from the Rule Against Perpetuities.

Construing Charitable Intent Cy Pres Rule: If a charitable purpose of a trust is no longer relevant or feasible, a court can change the charitable beneficiary to a purpose that most closely approximates the original intent If a change in law or societal attitude makes a charitable purpose illegal or against public policy, an original purpose can be overridden Then, the cy pres rule can be used to find new trust purposes If that is impossible or against the purpose of the trust, the trust may fail and be dissolved Courts in general have a lot of discretion to construe trusts to effectuate a charitable purpose.

Split Interest Charitable Trusts General Rule: To qualify as a charitable trust, the trust must have only charitable beneficiaries. If, for example, 12 charities and the grantor’s son are trust beneficiaries, this is NOT a charitable trust! Exceptions: Some trusts that are split by time periods are specifically allowed by the Internal Revenue Code as charitable trusts: Charitable Remainder Trust (CRT) Charitable Lead Trust (CLT) In both cases, only the value of the charitable interest in any contribution gets the tax benefits of a charitable trust.

Charitable Remainder Trusts A private interest in the grantor or the grantor’s beneficiaries occurs first For a certain number of years or until an event such as the grantor’s death After that, the entire remainder of the trust must go to charity Types of Distribution plans: Charitable Remainder Annuity Trust (CRAT): Pays the present interest holder a fixed sum every year until the interest expires Charitable Remainder Unirust (CRUT): Pays the present interest holders, each year, a specified percentage of the trust’s value

Calculating the Value of the Charitable Interest The following factors are relevant in determining the charitable interest in the value of a gift to a split interest trust: The value of the contribution. The term of the non-charitable interest. If the non-charitable interest is based on the life of a beneficiary or beneficiaries, the anticipated term must be calculated based their life expectancies. The payout rate of the non-charitable interest. i.e., how much will be paid each year to the non charitable beneficiaries over the course of the pre-charitable term. The applicable federal interest rate. The future interest of the charity must be determined by assuming an interest rate that is equal to 120% of the federal midterm interest rate. “Section 7520” rate

Charitable Lead Trust The charitable interest occurs first. Then, after the term expires (number of years or event such as the death of the grantor), the trust reverts to the grantor or her beneficiaries. Calculation of the charitable interest is done in the same manner. Types of Distribution plans: Charitable Lead Annuity Trust (CLAT): Pays the initial charitable beneficiary a fixed sum every year until the interest expires Charitable Remainder Unirust (CLUT): Pays the initial charitable beneficiary, each year, a specified percentage of the trust’s value

Issues Common to Split Interest Trusts Funded by a one time initial contribution. If the client wants to do it again the next year, you should set up a separate trust Both can be grantor or non-grantor trusts. In a CLT, either the grantor is going to have to pay the tax or the trust will. Since the grantor took an initial income tax deduction when the contribution was made, you can’t take another income deduction when the lead interest money is given to charity. Both should usually be established to be outside the estate of the grantor. So, you need to be careful not to give the grantor benefits or powers that could run afoul of §2036 or §2038. Annual filing requirements exist in many states Even a charitable trust that pays no income tax files a federal Form 990 each year.

Pooled Charitable Funds Alternative to establishing a charitable trust that is much cheaper and easier to do and retains most of the benefits. The donor establishes an account with a brokerage firm and contributes the money. The donor can take the income tax deduction right away. The money in the account can only be paid out to charitable 501(c)(3) organizations. In most such funds (“donor advised” funds), the account donor can “advise” that money from the account be given to a specific charitable organization. But the fund manager is not necessarily bound by the recommendation of the account holder.