Charitable or Charity Trusts

Several types of charitable or charity trusts exist, including:

Charitable Remainder Trust

With a charitable remainder trust, one puts assets, ofttimes appreciated assets, into a Charitable Remainder Trust and takes back a 5 – 10% (of asset value) stream of income for a period of years, or for a lifetime, and then at death whatever remains in the trust goes to charity, which may or may not be irrevocably chosen. Most of the time, the charitable remainder trusts’ ultimate charitable beneficiaries at the time the trust is formed can be changed by the trust maker or grantor any time before the term of the trust ends. Sometimes, you will see them irrevocable if the donor really wants to make sure that the charity is vested, ultimately in the remainder amount.

Charitable Lead Trust

A charitable lead trust is the flipside; one puts assets into the charitable lead trust, and there is a cash flow, typically 5 – 10%, that goes to the charity for a term of years, or for one’s lifetime. Then, when one is deceased, the remainder goes to family members or a family trust of some kind.

Typically, when charitable trust is considered, there is some cash flow stream that is an annuitization, and then there is a remainder. How that is structured depends on whether it is a charitable remainder trust or a charitable lead trust.

Charitable Annuity Trust

A charitable annuity trust is where money is given to a charity, and the charity themselves pays an annuity stream back to the donor, or the donor’s specified beneficiaries for a period of time. Annutiy streams oftentimes have different character of income, depending on how the money is earned, and whether there is a significant capital gain account that has built up because of the sale of appreciated assets that is in the charitable annuity stream, or a charitable remainder trust, for example.

Charity Trusts

Separate from the above, there are charity trusts or charitable trusts where one puts money into a trust with no stream except for distributions that are going to charitable purposes that are going to be released based on the terms of the trust.

Often, there are scholarship funds, religious, educational, community, research kinds of charitable interests; the money is put into a trust that is now going to operate for that particular charitable purpose that may or may not be in support of an existing charity; it may be its own stand-alone charity, which may distribute to other 501(c)(3) charities or may be an operating foundation that actually does work in the world and funds needy causes.

Not-for-Profit Corporate or Legal Trusts

There is another distinction to be made: a charity, per say, can either be a corporation or a trust in its legal formation. Both are “not-for-profit.”

  • A charity that is a trust is formed under a state’s trust code.
  • A charity that is a corporation is formed under a state’s not-for-profit corporation code.

Both types apply for a 501(c)(3) qualification, either as a private or public charity with an Internal Revenue code, that is separate from their legal formation as either being a charity that’s a trust or a charity that’s a corporation. There are differences in liability for someone who is a trustee of a charitable trust compared to someone who is a director of a not-for-profit corporation or charity corporation.

For more information, read this IRS report: Private Foundations: Treatment of revocable trusts that become charitable trusts