What are the benefits of a Charitable Trust?  For those with charitable inclinations, a Charitable Trust can be an excellent way of passing property to both family beneficiaries and a charity.  If properly created and funded, the Charitable Trust can generate income tax deductions, and property will not be subject to estate or gift taxes.  In addition, the Charitable Trust is an excellent tool for individuals with highly appreciated property, such as stocks or real estate.  Because property is being distributed to a qualified charity under a Charitable Trust, no capital gains are recognized.

What types of Charitable Trusts are there?  There are two types of Charitable Trusts recognized by the IRS.  The Charitable Unitrust, and the Charitable Lead Trust.  The Charitable Unitrust (often called the Charitable Remainder Trust), is set up so that income from property held in trust is distributed to one or two lifetime income beneficiaries.  The remainder of the property is then distributed to a qualified charity.  The income beneficiary can be yourself, a family member, or a third-person.  By making yourself an income beneficiary, you can provide additional income to yourself upon retirement.

In addition, a Charitable Remainder Trust must be set up so that a minimum of 5% of the trust property is distributed to the income beneficiary.  The distribution can be a percentage up to 50%, but the higher the percentage that is required to be paid out, the lower the income tax deduction.  The IRS uses the present value of the remainder to determine income tax deductions, so it is a good idea to generally keep the percentage paid out to below 10% of the trust property.

A Charitable Lead Trust differs from a Charitable Remainder Trust in that income is paid to a qualified charity for life, and the remainder is paid to another beneficiary, perhaps a family member.  The beneficiaries simply switch positions.  This type of trust also can provide income tax and estate tax savings if created properly. 

Because both types of trusts are irrevocable, the trusts are not included in an individuals estate for estate tax purposes.  With the highest rate for Federal estate taxes at 45% in 2007, in large estates $0.45 of every dollar can be passed on to the income and remainder beneficiaries, instead of to the government.

Because of the technical nature of drafting these documents, it is important to have a qualified estate planning attorney draft them for you, and to further explain the ramifications of these trusts.