What… you want to know about setting up a charitable trust???

One of the first questions that come up when trying to learn about something is seeing who has done this before. The answer to that is quite simple actually, Bill Gates, Warren Buffet, this author (not really) or any member of the now famous “Giving Pledge”. These billionaires have essentially done what most Americans regardless of their financial well being have striven to do, donate to charity. What makes them special is that they have committed to donating a large sum of their proverbial nest egg to charity, in an unprecedented fashion.

At this point within the article we may or may not be familiar with the major types of trusts that are available such as living trusts, trust for children, and revocable trusts. But essentially these are just financial mechanisms that allow for direct transfer for assets to an individual based on a set of rules which vary from one trust to another. A Charitable trust actually considered as a form of irrevocable trust that comes in two flavors, a lead trust and a remainder trust. Deciding on which trust to choose may be a little difficult but the easiest thing to do is to think about what your end goal and most importantly when can the money be put to the best use.

A lead trust is sometimes naively thought as a loan, which is not accurate. With in a lead trust the provider of the trust simply donates income of a trust to charities for a specified period of time. Once that period of time comes to fruition, the assets are then returned to the beneficiaries. The length of time these assets stay within the trust is variable as this is typically done as a means to avoid taxes. A remainder trust is similar to a lead trust with one major difference. The order in which the assets are disbursed is in reverse. Instead of the first distributing the assets to charities then distributing the remaining capital to the beneficiaries, this process is done in reverse. The money is distributed to the beneficiaries first for a specified period of time and once that time period has expired the remaining assets are then given to a charity.

Both of these trust methods are clever techniques that one can employ to avoid taxes. This may not be of a pressing concern to ordinary Joe Schmoe on the street. But when you are talking about a significant amount of capital, these taxes can be very large. When deciding on which trust method is ideal that is totally up to you. The best example that can come up with asks the question, “When will they need the money”. For instance if you are talking about potentially putting some money away for children a lead trust may be a good idea. You can put time constraints on it in which the money can be left to a charity up until the time when they are eligible to take ownership of the funds.