Charitable trusts and foundations can be used to both secure personal, family or business assets and enable philanthropic endeavors. Each one provides assets, such as securities, with protection from lawsuits and other claims. Trusts and foundations also can offer significant tax benefits as well as privacy. Charitable trusts are easier to set up and provide more privacy. Foundations are incorporated as separate legal entities. Many well-known charitable organizations are set up as foundations or charitable trusts. Here’s an overview of each one and how they compare.
A financial advisor can help you pick the most appropriate ways to do estate planning.
Charitable trusts and foundations can be funded with almost any type of asset. Funds may be provided by cash and bank accounts, stocks and other securities, homes and other real estate, proceeds from life insurance policies, business ownership interests and collectibles.
Charitable purposes are just two reasons to set up trusts and foundations. These tools can also be used to help with succession planning and business continuity, to protect minors and other vulnerable beneficiaries and to shield assets from divorce claims. The tax benefits and privacy benefits of trusts and foundations can apply to all these uses as well.
Foundation Basics
A foundation is a private nonprofit organization devoted to charitable purposes. The cash, securities, real estate or other assets used to fund the foundation can come from an individual, a family or a business. Once assets are transferred to the foundation, they no longer belong to the founder or founders. A foundation charter lays out the purpose and intended activities of the foundation.
The assets in the foundation typically fund grants to other nonprofits. A board of directors decides which grants to give money to and otherwise oversees the activities of the foundation. Compared to charitable trusts, foundations may cost less, face less regulation and have more tax benefits.
The Internal Revenue Service recognizes private foundations as charitable organizations under the 501(c)3 chapter of the tax code. This makes the foundations exempt from federal income taxes. Individuals and corporations can get tax deductions by making contributions to private foundations. Private foundations may have to pay excise tax on net income from investments, however.
Charitable Trust Basics
A charitable trust gets created when a grantor gives a trustee title to some property or assets. Many types of trusts exist and other types, such as living trusts, are widely used for estate planning, wealth transfer and other purposes. The designated beneficiaries of charitable trusts may be particular groups of people, such as disabled veterans. Charitable trusts have been around longer and are more widely used than foundations.
Unlike foundations, charitable trusts are not separate legal entities. Creating a trust requires filing no articles of incorporation or other documents with the secretary of state or other agency. Because of that, trusts are particularly good for maintaining privacy.
The document that organizes a trust is known as a trust deed. It describes the beneficiaries and instructs the trustee how to use the assets of the trust to benefit the designated beneficiaries. Trusts may award scholarships to individuals, grants to charitable organizations or otherwise use assets to help beneficiaries. The trustee decides how to use the assets in accordance with the trust deed, and the original grantor may have limited ability to direct the trust’s actions.
Like foundations, contributions to charitable trusts can be deducted for income tax purposes by individuals and businesses. The IRS otherwise treats charitable trusts like foundations, requiring them to pay excise taxes on investment income, unless the charitable trust is classified as a public charity.
Bottom Line
Charitable trusts and foundations both provide asset protection, tax benefits and privacy to wealthy individuals, families and businesses. They can be used in estate and succession planning and as a way to support selected causes and charities using assets transferred from an individual, family or business. Trusts are easier to set up and don’t have a separate legal existence. Foundations are organized as separate legal entities and require filing articles with the secretary of state of the relevant jurisdiction.
Tips on Estate Planning
- A qualified and experienced financial advisor can assist you in evaluating your unique situation when making the decision between a charitable trust and a foundation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re concerned with the impact of taxes on your retirement income, you may want to consider where you spend your golden years. Check out our rundown of the most tax-friendly states for retirees.
- Consider a charitable remainder trust. It’s an irrevocable trust to which you contribute assets. You or a chosen beneficiary can then use the resulting stream of income. The remainder of the funds go to charity or charities of your choice. Placing assets in a charitable remainder trust reduces your individual taxable income.
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