The Importance of Charitable Foundation Trusts
Charitable foundation trusts are irrevocable trust structures that can be used to make charitable contributions, assist with estate planning and even manage an operational charity. The tax code has specific requirements for charitable trusts in order for them to receive tax-exempt status. However, if structured correctly, a charitable foundation trust can offer many benefits. A charitable foundation trust is a trust that is irrevocable, has charitable purposes and qualifies as a public charity under Section 501(c)(3) of the Internal Revenue Code. In addition, the trust must meet two distinct tests: the public test and the private test. A properly structured charitable foundation trust should also have no more than 20 qualifying beneficiaries and you cannot be a trustee or a beneficiary of your own trust.
Key Elements of a Charitable Foundation Trust
There are several essential elements to a charitable foundation trust. First, a charitable foundation trust must have a charitable purpose. This means that the trust must be used to advance a specific public interest. Second, a charitable foundation trust must be irrevocable. Once a trust is established, it cannot be revoked and any remaining funds at the end of the trust must be distributed to another charitable trust. Finally, a charitable foundation trust must be a public charity. This means that it must be organized for a public interest and not be operated for the benefit of a private individual or a small group of people. The IRS also considers the source of the funds used to create a charitable foundation trust. If the trust is funded with your individual assets, then the trust must be used to benefit the public. However, if the trust is funded with funds from an organization, such as an estate, then the trust may not need to benefit the public.
Making Tax-Free Donations Through a Charitable Foundation Trust
A charitable foundation trust offers significant tax benefits for donors. The initial tax benefit is that a donor can claim an immediate deduction for the gift made to the charitable foundation trust. In addition, the trust may be able to make tax-free distributions to charity for the duration of the trust. This is because the charitable foundation trust can be structured to receive a retroactive tax-exemption. If the charitable foundation trust meets the requirements for a retroactive tax-exemption, then the trust is not subject to income tax on distributions to charity each year. This can create significant tax savings for donors because the trust is not required to make estimated tax payments each year like an individual taxpayer would. In fact, donors may be able to claim a charitable deduction for prior years in which they did not itemize deductions.
Managing an Operational Charity Through a Trust
Managing an operational charity through a charitable foundation trust offers several benefits. First, a donor who does not want to directly manage a charity may consider using a charitable trust to ensure that a charity receives the funds to operate. The trust is responsible for ensuring that the charity receives the funds it needs to operate. A charitable foundation trust can also be used to manage a charity that a donor does not want to directly control. A donor can use a charitable trust to manage a charity and the trust can be structured to provide the donor with decision-making authority. This means that the donor controls when the funds are distributed to the charity.
Estate Planning Benefits of a Charitable Foundation Trust
A charitable foundation trust can assist with estate planning because the trust is irrevocable and the funds can be distributed to charity after the death of the donor. A donor can use a charitable foundation trust to ensure that a specific charity receives funds after the donor dies. In addition, a donor can use a charitable foundation trust to provide funds to a loved one after death. A donor can fund a charitable foundation trust with a predetermined amount and the trust can be structured to distribute funds to a beneficiary after the death of the donor. A donor can also use a charitable foundation trust to ensure that a specific charity receives a certain amount of funds after the donor dies.
A charitable foundation trust offers many benefits. First, a charitable foundation trust can be used to make tax-free donations to charity. Second, a charitable foundation trust can be used to manage an operational charity. Finally, a charitable foundation trust can be used to assist with estate planning after the death of the donor.