A charitable trust is a special estate planning device that allows you to gift a substantial amount to the charity of your choosing while taking advantage of certain tax benefits. For a charitable trust to be the most beneficial form of gift giving to a charity, typically the charity must be accepted by the Internal Revenue Service as tax exempt. There are several tax advantages to a charitable trust. A comprehensive understanding of these benefits will not only help the gift giver and charity, but the gift giver's heirs as well.
The first benefit to a charitable trust is that the gift giver will be allowed to take advantage of an income tax deduction for five years. Even though the tax deduction is not a dollar for dollar, the IRS will determine what amount the gift giver can deduct. This deductible amount is calculated by taking the original trusted gift and subtracting the amount expected in return.
Typically when an individual creates a charitable trust, their estate is quite large. The second tax benefit comes through designating a portion of the large estate that goes to the charity. By putting valuable property in a charitable trust, that property will not be used to calculate the estate tax upon the gift giver's death.
A charitable trust can hold many different types of assets. Therefore, another tax benefit is received by turning non-income producing property into cash. If an individual were to sell valuable property themselves, it would be subject to a capital gains tax. However, property put into a charitable trust will produce income for the gift giver that is not subject to capital gains tax.
Charitable trusts can be useful devices when planning a large estate. They are, however, quite complex and drafting an effective and comprehensive charitable trust may require the help of an experienced attorney.