Charitable Trusts
Charitable trusts offer a powerful way to support causes you care about; they can blend philanthropy with significant tax/financial advantages and legacy planning for lasting impact. These are irrevocable legal arrangements that allow donors to transfer designated assets to a trust that benefits charities and provides income streams, all while reducing tax burdens. Such trusts can be funded with cash, stocks/bonds, real estate or other business interests with value. After setting up the charitable trust and transferring asset(s), the asset is typically sold within the trust (typically bypassing capital gains and allowing the full sale value to fund the trust) and a professional trustee manages ongoing investments and distributions.
Why Choose Charitable Trusts for Philanthropy? The layered tax advantages of charitable trusts can be very appealing. Here are some of the benefits:
- Donors get an income tax deduction upon funding (for the present value of charitable interests)
- Donors can diversify a concentrated position without triggering a massive tax bill
- The trust can continue to grow tax-free
- Donors and other designated individuals can receive an income stream for life or a term of years
- The assets used to fund the charitable trust are removed from the estate which can help reduce potential estate taxes in the future (should thresholds change again)
- The trust provides a structure to involve family members in philanthropy
- Legacy Building: Donors can support qualified organizations they value, often quite sizably, and provide a structured way to continue charitable giving beyond a lifetime.
- Donors can customize beneficiaries and payout structures to fit unique needs.
- Charitable trusts provide a support mechanism to support long-term goals and can fit alongside donor-advised funds or other charitable gifts for diversified giving
However, since charitable trusts are irrevocable and require specific legal set-up along with set-up costs, they are more appropriate for larger estates (but can be viable from $100K+ depending on goals and costs).
Types of Charitable Trust: 2 main types of charitable trusts: CRTs and CLTs.
The primary difference is the order of payments: A Charitable Remainder Trust (CRT) pays income to you or other individual beneficiaries first, with the remainder going to charity, while a Charitable Lead Trust (CLT) pays income to charity first, with the remainder passing to individual beneficiaries. CRTs focus on immediate income and tax-efficient asset diversification, while CLTs are most often used for transferring wealth to heirs at reduced tax costs.
Charitable Remainder Trusts: Income First, Charity Later
Charitable remainder trusts (CRTs) prioritize income to an individual (you, your spouse or another individual), and then whatever is remaining goes to charity. Individual(s) receive income for life or a set term up to 20 years. This can be great for retirees needing steady cash flow alongside giving. There are 2 types of CRTs:
- Annuity Trusts (CRATs): CRATs pay a fixed dollar amount annually, calculated at creation, and no additional contributions are allowed. CRATs provide predictable income regardless of asset performance.
- Unitrusts (CRUTs): CRUTs distribute a fixed percentage based on annually revalued assets held in the trust. Income is thus tied to investment growth or decline. This offers the potential for increasing income as trust assets grow, but there is an element of market risk. Extra contributions are allowed.
Notes: Use a CRT for income planning (wanting income from your assets), selling/diversifying appreciated assets such as stocks or real estate and wanting to support charity later. A CRT can also be an efficient tool to provide a succession plan for your family business. A CRT provides an immediate tax deduction for the present value of the future gift to charity. A 10% minimum remainder is required to go to the charity later and a minimum 5% income payout applies.
Example: A donor with $500,000 in appreciated securities gifts those holdings to a CRT. He/she then sells it tax-free, gets 5% or more in annual income, receives a large upfront charitable deduction based on charity’s projected remainder and fulfills philanthropic goals knowing that the charity gets the rest.
Charitable Lead Trusts: Charity First, Family Later
The opposite of CRTs, charitable lead trusts (CLTs) direct income to charities upfront for a set period of time, with remainder of assets later going to family or other named non-charitable beneficiary. CLTs are useful for passing wealth to heirs tax-efficiently. There are also two types:
- Annuity Lead Trusts (CLATs): CLATs provide fixed annual payments to charity, preserving principal for beneficiaries.
- Unitrusts (CLUTs): CLUTs pay a percentage of assets yearly, adapting to market changes. CLTs reduce gift and estate taxes on remainder interests, a benefit for high-net-worth families.
Use a CLT if you have large, high-growth assets you want to pass to heirs, want to minimize gift/estate taxes, and wish to provide current support to charity. There is no 20-year restriction; it can last for any specified term. Generally, the donor receives an upfront charitable deduction for the present value of the income stream going to the charity. Some families use CLTs to fund education while supporting causes they care about.
Real Estate - A tax-smart approach to maximize your philanthropic impact
Real estate such as a personal residence, vacation home, farm, commercial property or undeveloped land can be considered as a charitable donation. This type of donation may qualify for a federal income tax charitable deduction and you may minimize or eliminate capital gains tax. Plus you no longer have to deal with that property's maintenance costs, property taxes or insurance. You can gift the full value of the property or a percentage. Contact the Santa Barbara Maritime Museum for additional information.
Endowed Gifts
An endowed gift is a permanent, invested donation made to the Museum where the principal amount is held in perpetuity, invested to grow over time, and provides a portion of the investment returns - often 3% to 5% annually - to support specific purposes, such as funding Museum education programs or operational needs. These gifts provide a stable, long-term sustainable source of funding and are often considered as “the gift that keeps on giving”.
Bequests
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Specific Bequest – involves making a gift of a specific asset such as real estate, other property or a gift for a specific dollar amount. For example, you may wish to leave a specific cash dollar amount, specific securities, your home, vacation home, boat, etc. or to the Santa Barbara Maritime Museum.
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Percentage Bequest – leaves a specific percentage of your overall estate to a named charity or charities.
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Residual Bequest – a gift is made from the balance of an estate after the will or trust has given away any specific bequests. A common residual bequest involves leaving a percentage of the residue of the estate to charity. For example, you may wish to leave 20% of the “residue” of your estate to the Santa Barbara Maritime Museum.
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Contingent Bequest – A contingent bequest is made to charity only if the purpose of the primary bequest cannot be met. For example, you could leave specific property, such as a vacation home, boat, valuable collectible, to an individual but that person is deceased at the time of your death so that designated asset would then go to a named contingent beneficiary such as the Santa Barbara Maritime Museum.
Naming the Museum:
Naming the Santa Barbara Maritime Museum in your trust or will, or as the beneficiary of a retirement account or Charitable Trust offers many options:
- Retirement accounts - As a percentage or full beneficiary of your IRA, 401k, 403b or other retirement account
- Trust or Will
- A bequest of a specific dollar amount or percentage of your estate
- A percentage, residual or remainder beneficiary after you have made other gifts from the remaining portion of your estate
- A bequest only if other designated beneficiaries do not survive you
- Charitable Remainder Trust which is irrevocable and pays income to you or your beneficiaries first, with the remainder going to the Museum and/or other charities.
- Charitable Lead Trust which is irrevocable and pays income to the Museum and/or other charities first for a specific term, with the remainder passing to the beneficiaries.
If you wish to name Santa Barbara Maritime Museum - Santa Barbara Maritime Museum, 113 Harbor Way, Suite 190, Santa Barbara, CA 93109. Tax ID #: 77-0392953
Please let us know that you have named the Museum in your estate plan as this helps ensure your gift’s intent is clear, can prevent future complications pursuant to who receives the asset and helps us with long range planning initiatives.
Discussing charitable giving with your attorney or other professional advisors to ensure your goals are best achieved is highly recommended. Please feel free to contact us to request any additional information that might be helpful to you and your attorney.