Charitable Trusts

Charitable trusts embody many of the benefits of planning a gift within the context of your overall financial and estate planning.  These tools are tremendously flexible, offer a number of significant tax benefits, and can provide financial benefits to you, your heirs, and charities such as MLR.  They can be established either during life or can come into being through a provision in your will or living trust.  If you own an asset that is too risky for you or is not generating enough income, and you want to diversify your investments while avoiding both up-front and long-term capital gains and income taxes, a charitable trust may offer unmatched benefits while providing you with a way to make a significant gift to MLR in the future.

The two basic types of charitable trusts are the charitable remainder trust and the charitable lead trust.  With a charitable remainder trust, the more common version, the charity receives the remaining balance in the trust after the trust pays income to you or your heirs for a specified period of time.  With a charitable lead trust, the positions are reversed: the trust pays income to charity for a certain period of time, and the remainder is then distributed to your heirs at the end of the designated period.  Charitable lead trusts can enable you to make a significant gift to charity while at the same time preserving family wealth intact for future generations.  Charitable lead trusts can be a tremendously effective method of avoiding gift and estate taxes.

An example of a typical fact pattern for a charitable remainder trust is below.

  1. You transfer cash or appreciated property to the trust, which will pay you income for your life or for a set number of years.  (You can also name a spouse, children, or others as beneficiaries of the income stream.)  You get an income tax deduction for the full value of your donation in the year of the gift, which can be carried forward for up to five years if needed.  Montana residents are eligible to receive the Montana Endowment Tax Credit as well.  The trust is tax-exempt, so it can sell the property and reinvest the proceeds without incurring capital gains taxes.  You can make further gifts to the trust in the future and receive additional tax deductions.
  2. During your life (or the term of the trust), the trust will pay you income, typically based on the value of the assets in the trust.  Income that the trust earns is generally tax-exempt—a significant difference between a charitable trust and other types of trusts.  You are therefore able to benefit from tax-free growth of your portfolio inside the trust.  Income you receive from the trust may be taxed at preferential rates.
  3. After you and other beneficiaries pass away, or at the end of the term, the remainder in the trust is distributed to MLR and other charities.  You may direct that MLR use the assets for a specific purpose, or can allow MLR to use the assets where they are most needed.