There are many ways to donate to charity, but few think of creating a charitable trust. To create a charitable trust, there must be a donor, a trustee, and a beneficiary. The donor sets up a trust and transfers to the trust all property the donor wants to donate to charity. The charity serves as the trustee of the trust and is in charge of investing, protecting, and managing trust funds. The charity will pay the beneficiary, who can be a third party or the donor, a portion of the income that the trust property accumulates. The trust will end at the time of the donor’s death or at the end of a term of years, and the property remaining in the trust will go to the charity.
In addition to giving back to the community by donating to charity, the donor can benefit from several tax advantages by setting up a charitable trust. First, a donor is allowed an income tax deduction for the value of the trust property spread over five (5) years. The value of the property is based on what the Internal Revenue Service (IRS) deducts from the income the donor expects to receive from the property. For example, if the donor donates $100,000 but can expect to receive $25,000 in income (based on life expectancy, interest rates, and how the trust document is set up), the value of the property is $75,000.
Second, the beneficiary does not have to pay federal estate tax. When the trust property eventually goes to the charity outright (at the donor’s death or at the end of the term of years), the property is no longer in the donor’s estate—so the property is not subject to federal estate tax.
Third, a donor can turn appreciated property (property that has gone up significantly in value since the donor acquired it) into cash without paying capital gains tax on the profit. Because a charity, unlike an individual, does not have to pay capital gains tax, the proceeds stay in the trust and are not taxed when the charity sells the property. For example, the donor owns stock worth $300,000. She paid $20,000 for it twenty (20) years ago. She creates a charitable trust and funds her trust with her stock. The charity sells the stock for $300,000 and invests the money in a mutual fund. The donor receives income from this $300,000 for her life. If the donor sells the stock herself, she would have to pay capital gains tax on her $280,000 profit, but no capital gains tax is assessed against the charity.
As a result, creating a charitable trust is clearly an attractive option to donate to charity, as there are also many tax advantages to creating a charitable trust. However, whether a charitable trust is right for you is dependent on several factors. These factors include the amount and type of property involved, the degree of control you want in the trust, and the benefits you seek to gain. Give us a call, and we can help choose the best option for you to give back to the community.
Thanh Le is an associate attorney at Nguyen & Chen, LLP, whose practice focuses on litigation and corporate law. She obtained her Bachelor of Science in Biotechnology from the University of Houston and her Juris Doctor from South Texas College of Law, both with Magna Cum Laude honors. She is also fluent in Vietnamese and has spent her time volunteering at Houston Volunteer Lawyers, LegalLine, and Veterans Legal Clinic.