Charitable Trusts Lawyers in Phoenix, Arizona
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For many wealthy individuals, securing their own families’ financial futures isn’t enough—they want to give something back to their communities and the world. One way to accomplish this is through the creation of a charitable trust.
As a specific estate planning tool, a charitable trust is a type of legal arrangement that allows individuals to contribute assets to a charitable cause. In fulfilling their philanthropic goals, they not only secure their legacies but may also receive certain tax advantages.
If you’re interested in establishing this type of trust, an estate planning lawyer from Copper State Planning can help. This article will explain everything you need to know about charitable trusts, how they work, different types of charitable trusts, potential benefits, and more.
How Charitable Trusts Work
Charitable trusts are established as part of an individual’s larger estate plan and can be tailored to meet specific charitable goals, financial objectives, and tax planning needs. They work by allowing an individual to contribute assets to the trust, which is then managed by an appointed trustee. The specific mechanisms for running a charitable trust depending on its type. These trusts typically fall into one of two categories: charitable remainder trusts (CRTs) or charitable lead trusts (CLTs).
Charitable Remainder Trusts (CRTs)
Charitable remainder trusts are designed to provide income to a non-charitable beneficiary or beneficiaries for a specified term. This period of time may be the beneficiaries’ lifetimes or a fixed number of years, not exceeding 20 years. After this period expires, the remaining trust assets are donated to one or more charitable organizations chosen by the grantor (person who creates the trust).
The grantor of a CRT may receive a partial income tax deduction when the CRT is funded. This deduction is based on the present value of the remainder interest that will eventually be given to charity. In the meantime, the trust’s grantor or beneficiaries will receive an annual income from the CRT, either as a fixed amount or a fixed percentage of the trust’s value.
For high-net-worth individuals, establishing a CRT can offer distinct tax advantages. By removing the assets from the grantor’s estate (provided the trust is irrevocable), a CRT can help reduce a grantor’s estate taxes while supporting the causes that matter to them.
Charitable Lead Trusts (CLTs)
A charitable lead trust, on the other hand, works the opposite way. A CLT provides an income stream to one or more charitable organizations for a fixed period of time. When the term expires, the trust’s remaining assets revert back to the grantor or pass to other non-charitable beneficiaries, typically family members.
When properly structured, a CLT can provide significant estate and gift tax savings, in part because the assets that eventually pass to non-charitable beneficiaries are likely valued at a lower amount for gift or estate tax purposes. Ultimately, CLTs allow grantors to support the charities and missions they care about while also keeping the principal within the family—potentially at a reduced tax cost.
Choosing the Right Charitable Trust in Arizona
The right charitable trust for you depends on your specific goals. If you want to support a charity while simultaneously providing for your family, a CRT may be your best option. If you want to support a charity immediately and eventually recover the remaining trust assets, a CLT may be the better choice.
Although both types of charitable trusts offer potential tax benefits, the specific advantages and their terms differ. This is one of the many reasons that you should consider working with a charitable trusts lawyer when choosing the most appropriate type of charity trust for you.
Benefits of a Charitable Trust
Charitable trusts offer a wide range of benefits to both the grantor and the charitable organizations that ultimately receive the funds. The following are among the most notable advantages associated with charitable trusts:
- Tax benefits. Depending on its type and how it’s structured, a charitable trust can offer income tax deductions, estate tax reductions, and even the ability to avoid capital gains tax.
- Income for non-charitable beneficiaries. Depending on whether it’s a CRT or CLT, a charitable trust can provide a stable or fixed income distributions for non-charitable beneficiaries.
- Philanthropy. By establishing this type of trust, an individual can fund the charitable purposes that matter most to them.
- Asset protection and management. After you transfer assets to a charitable trust, those assets are protected from creditors. When properly invested by experts, charitable trusts can grow assets substantially over time.
- Flexibility. Grantors have considerable flexibility when designing certain aspects of their trust, including control over charitable beneficiaries, income beneficiaries, trust terms, and more.
- Building a legacy. Establishing a charitable trust can ensure you build a lasting legacy, associating your family name with the charitable causes you care about.
Charitable trusts can offer numerous advantages when created and properly managed by professionals. However, they aren’t appropriate for every situation, and they also come with several potential disadvantages.
Disadvantages of a Charitable Trust
Before establishing a charitable trust, it’s important to consider the limitations associated with this particular estate planning tool. Potential drawbacks include the following:
- Irrevocability. As a type of irrevocable trust, charitable trusts are typically permanent decisions. Once established and funded, the grantor is generally unable to reclaim the assets they’ve transferred into the trust.
- Complexity and cost. Creating a charitable trust involves many complexities, and it may involve substantial legal, accounting, and administrative costs. Ensuring compliance with tax laws and trust regulations may require professional management, which can also be costly.
- Impact on beneficiaries. Establishing a charitable trust may also reduce the inheritances of family members and children. Additionally, the annual income received by beneficiaries can vary, depending on the trust’s investment performance.
- Funding requirements. To make a charitable trust worthwhile, grantors often have to make a significant initial contribution.
- Rigidity in charitable beneficiaries. After the trust’s charity beneficiaries are designated, changing them can prove difficult, if not impossible.
Additionally, terminating a charitable trust can be a highly complex and frustrating endeavor, depending on the trust’s specific terms and applicable state laws. The process.
Terminating a Charitable Trust
Terminating a charitable trust can be complex and depends on the type of trust, its specific terms, and applicable state laws. The process may require a grantor to consult with legal and financial advisors, obtain consent from interested parties, seek court approval, file various legal documents, distribute remaining trust assets, and more. The in-depth nature of the termination process can pose a significant deterrent to grantors and require legal assistance to navigate.
Copper State Planning: Knowledgeable Charitable Trusts Lawyers in Arizona
Charitable trusts can do a tremendous amount of good in the world and provide substantial benefits to their grantors—when they are set up and managed properly. If you are interested in exploring this option, the charitable trusts lawyers and estate planning attorneys at Copper State Planning can help. Contact us online to schedule a consultation or call our law office at (480) 442-6413 for top-tier legal advice.
