The Benefits of Charitable Trusts in Estate Planning
July 31, 2025
Charitable trusts can reduce income and estate taxes while allowing you to support causes you care about. Understanding the benefits of these trusts in estate planning sets the stage for a legacy that lasts.
The Law Offices of Julie A Schejbal, CHTD helps Maryland families use charitable trusts to achieve both philanthropic and financial goals. Our Maryland firm guides clients through selecting, funding, and administering trusts that benefit chosen charities and heirs.
Essential Info About Charitable Trusts
Charitable trusts are legal arrangements in which you transfer assets to a trust that benefits a nonprofit organization. You retain certain rights—such as income distributions—while directing the ultimate remainder to charity.
These vehicles marry philanthropic intent with estate-planning flexibility, letting you achieve tax savings today. Establishing a charitable trust requires clear documentation of your charitable objectives and the trust’s terms.
A trust document must name the charitable beneficiary, specify distribution terms, and appoint a trustee. The trustee—whether an individual or institution—manages assets in accordance with your instructions. You can adjust distributions based on income needs or market conditions. This balance between control and charity distinguishes charitable trusts from outright gifts.
Tax Advantages of Charitable Trusts
Charitable trusts offer significant tax benefits under federal and state law, making them attractive in estate planning. You may claim an immediate income-tax deduction for the present value of the charitable remainder, subject to adjusted gross income limits. Transfers to the trust also reduce your taxable estate, potentially lowering or eliminating estate taxes.
These benefits extend beyond income and estate taxes to capital-gains planning, as appreciated property can pass into the trust without immediate gain recognition. Over the trust term, distributions to you are taxed according to a tiered system, often at lower rates. Utilizing these advantages efficiently requires careful valuation and timing.
Types of Charitable Trusts
Choosing the right trust type depends on your income needs, asset composition, and philanthropic goals. Two primary options are charitable remainder trusts and charitable lead trusts:
Charitable remainder annuity trust: Pays you a fixed dollar amount annually, with remainder to charity.
Charitable remainder unitrust: Pays you a percentage of trust value each year, adjusting with market performance.
Charitable lead annuity trust: Pays income to charity for a term, then remainder to heirs.
Charitable lead unitrust: Pays a variable amount to charity, with remainder shifting to family beneficiaries.
Each structure offers unique income patterns and tax treatments. Selecting the right model aligns distributions with your cash-flow needs and legacy plans.
Maintaining Control Over Trust Assets
Although a charitable trust supports nonprofit causes, you can maintain meaningful influence over assets during your lifetime or a term of years. You choose the trustee, define distribution schedules, and set rules for asset reinvestment. Through these mechanisms, you guide how and when assets are used.
If circumstances change—such as fluctuating income or shifting charitable priorities—you may include provisions allowing limited modifications. A well-drafted trust balances flexibility with permanence, assuring your charitable vision endures while adapting to life’s uncertainties.
Supporting Philanthropic Goals
Charitable trusts enable you to make substantial gifts to preferred charities without depleting your estate upfront. You can support educational institutions, health organizations, religious groups, or community foundations. By naming multiple charities or establishing successor beneficiaries, you create a lasting stream of support tailored to your passions.
Trust documentation can include stipulations on how charities use funds—such as endowment support, program funding, or capital projects. Monitoring annual reports from trustees and nonprofits assures adherence to your intent. This ongoing engagement fosters confidence that your charitable legacy thrives.
Addressing Compliance and Reporting Requirements
Administering a charitable trust requires strict adherence to IRS rules and state charity laws, with annual filings and disclosures. You must track distributions, maintain asset valuations, and file required returns on time to preserve tax benefits and trust status. Failure to comply can lead to penalties, loss of deductions, or trust termination. Key reporting requirements include:
Form 5227 filings: Annual information return for split-interest trusts detailing changes in trust assets.
Charitable distribution reports: Statements sent to nonprofits showing funds received and intended use.
State charity registrations: Annual renewals in jurisdictions where the trust solicits or receives donations.
IRS excise tax payments: Applicable to private foundations or lead trusts subject to excise taxes on investment income.
Staying on top of these obligations protects your trust’s privileged tax treatment and upholds your charitable intent. Regular reviews with your attorney and accountant help catch filing deadlines and governance issues before they become problems.
Protecting Family Heirs With Remainder Interests
One of the most powerful features of charitable remainder trusts is their ability to protect heirs’ interests while serving charity. After the income-payment term ends, the trust’s remainder passes to family members or other noncharitable beneficiaries you designate. This dual-purpose design blends philanthropy with inheritance planning.
You can specify contingent beneficiaries to address changing family dynamics or include safeguards against creditor claims. Structured remainder interests preserve family wealth while fulfilling charitable commitments, offering a balanced approach to estate distribution.
Comparing Charitable Trusts And Private Foundations
Charitable trusts offer immediate income-tax deductions and can provide you or your beneficiaries with ongoing payments, while private foundations require annual charitable distributions of at least 5% of net assets.
Trusts generally involve lower startup costs and simpler governance, making them ideal for individuals seeking a streamlined giving vehicle. Foundations, by contrast, allow you to retain decision-making control over grant awards, hire staff, and establish formal grantmaking procedures.
Your choice depends on factors such as desired level of oversight, administrative capacity, and distribution flexibility. Charitable trusts work well when you want a balance of tax benefits and income or remaining interests, whereas foundations suit those aiming for long-term family involvement in philanthropy.
Setting Up a Charitable Trust
Establishing a charitable trust involves several key steps that must comply with legal and tax requirements. These four steps include:
Selecting the trust type based on income needs and tax goals.
Valuing assets such as real estate, stocks, or business interests for accurate deductions.
Drafting the trust agreement with precise charitable and remainder provisions.
Funding the trust by transferring ownership of chosen assets under proper titling.
Timely execution of these steps assures the trust qualifies for tax benefits and operates smoothly. Coordination with financial advisors and appraisers strengthens the trust’s foundation.
Choosing Trustees and Beneficiaries
Picking a reliable trustee is crucial to administering your charitable trust effectively. Trustees can be individuals—such as family members or trusted friends—or institutions like banks or community foundations. Each option carries different cost structures, experience levels, and continuity considerations.
You also select primary and successor charitable and noncharitable beneficiaries. Clear naming conventions and contingency planning prevent future disputes. Regular reviews assure trustee performance meets your objectives and that charitable partners remain aligned with your philanthropic vision.
Funding Charitable Trusts With Real Estate and Business Assets
Real estate and privately held business interests make valuable trust contributions but pose valuation and liquidity challenges. You’ll need qualified appraisals and clear title transfers to satisfy IRS rules and trust document requirements. Transferring property may also trigger state transfer taxes or require loan payoff arrangements before funding the trust.
Business interests—such as shares in an LLC or S corporation—demand additional structuring considerations. You may need to adjust ownership agreements, address buy-sell provisions, or secure entity consents before moving shares into the trust. Proper planning assures these assets fund the trust efficiently without unintended tax or governance complications.
Contact an Experienced Lawyer Today
The Law Offices of Julie A Schejbal, CHTD serves the Maryland communities of Montgomery County, Prince George’s County, Baltimore County, Anne Arundel County, and Howard County.
Contact us today to learn more about how charitable trusts can reduce taxes, support causes you care about, and protect your family’s inheritance.