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Create a Lasting Philanthropic Legacy with Charitable Trusts

"Charitable trusts provide an opportunity to blend philanthropy with estate planning, creating a mutually beneficial scenario where you can support meaningful causes while potentially enjoying tax advantages."

Doug Martinson II

by Doug Martinson II
Martinson & Beason, P.C.

A charitable trust is a special trust where someone, usually referred to as a donor, sets aside assets to benefit specific charitable causes. The purpose of a charitable trust is to support philanthropic efforts like education, health, or helping those in need. Once the donor places these assets in the trust, a trustee manages them to ensure their exclusive use for the specific charitable purposes the donor had in mind.

It's important to note that this trust is irrevocable, meaning it's not easily changed once established. This intentional condition ensures the funds remain dedicated to helping others. In the United States, you must follow specific rules from the IRS to create a charitable trust and receive certain tax benefits. These rules are in place to guarantee that the trust genuinely supports charitable causes.

For those who contribute to these trusts, there’s an added benefit of potential tax deductions. This means you may be able to reduce your taxable income by the amount you contribute to the charitable trust. An example of a charitable trust is the ABC Trust by the Alabama Power Foundation, which focuses on helping low-income families with energy needs through various programs and grants. 

If you're interested in supporting charitable causes and exploring potential tax benefits, a charitable trust could be a meaningful option to consider during estate planning.

How Charitable Trusts Work

A charitable trust can be a useful tool for those who want to support causes while potentially gaining benefits through estate planning. Donors can place their assets, such as money, property, or investments, into a charitable trust. 

By doing so, you appoint a trustee (such as a family member, a friend, or a professional) to manage these assets. This arrangement protects the assets and ensures their use for the intended charitable purposes. Charitable trusts can be part of a broader estate planning strategy, helping you distribute assets according to your wishes while supporting philanthropic organizations.

When is a Charitable Trust the Right Choice?

There are different types of charitable trusts. Some can provide income to the donor during their lifetime and the remaining assets go to charity upon the donor's death. Others take effect only after the donor passes away, leaving a legacy for charitable causes.

Take, for instance, the Charitable Remainder Trust (CRT). It's a trust you create to donate some of your assets to a charity. What's unique about it is that you still receive income from those assets or can designate income to a beneficiary. There are two main types of CRTs: one providing a fixed income and another paying a percentage of the trust's value each year.

Then, there’s the Charitable Remainder Unitrust (CRUT). This trust generates income for beneficiaries and also donates to a charity. The appeal lies in its ability to reduce taxable income, avoid specific taxes, and offer an immediate partial income tax deduction. In other words, a CRUT lets you give to a charity while ensuring some income for yourself or others. It has several types, each determining income payments that offer flexibility for donors and beneficiaries.

Donors have the power to leave a lasting impact by consistently supporting their chosen causes. Being able to specify how their contributions will be utilized empowers donors to make a significant and long-lasting difference. Another perk of establishing a charitable trust is the potential tax benefits it offers. Donors may qualify for charitable contribution deductions based on the current value of the assets allocated for charitable purposes, which can help lower their taxable income.

Now, setting up a charitable trust in Alabama involves following specific legal guidelines. Attorneys who specialize in elder law and estate planning have the necessary expertise to navigate these complexities, ensuring the trust is not just established but set up correctly.

Every person's situation is unique. An attorney can tailor the charitable trust to meet your goals, considering your financial situation, family dynamics, and the causes you wish to support. For instance, if Medicaid planning is a consideration, an attorney experienced in Elder Law can help structure the charitable trust, so it aligns with your Medicaid eligibility goals while still supporting your chosen causes.

Ultimately, charitable trusts provide an opportunity to blend philanthropy with estate planning, creating a mutually beneficial scenario where you can support meaningful causes while potentially enjoying tax advantages.