Donors create charitable remainder trusts or charitable lead trusts by having lawyers draw up trust documents specifying the length of the trust and the disposition of trust income, reports Nolo. They then transfer assets into the trust. Once donors set up charitable trusts, they are irrevocable, but donors and their beneficiaries can receive income and tax breaks from the trust.Continue Reading
For charitable trusts to receive tax-exempt status, the charities that donors set them up for must have Internal Revenue Service approval, explains Nolo. In charitable remainder trusts, the charities manage trust assets and pay part of the income to the donor for a specific length of time. At the end of the time period, the charities own the assets outright. Donors benefit by receiving fixed annuities or a percentage of trust profits. They can also claim tax deductions for the value of their donations minus the projected amount of income that they may receive.
Donors generally set up charitable lead annuity trusts to receive tax breaks when donating to charities large amounts of money that they eventually plan to bequeath to family members, according to Nolo. The charity receives income from the trust for a certain number of years or a specified person's lifetime, and when the trust expires, the donor's beneficiaries receive the balance of the funds in the trust. This allows donors to avoid gift and estate taxes for the value of the charitable donation.Learn more about Financial Planning