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Home » Can a Charity Be the Beneficiary of a Living Trust?

Can a Charity Be the Beneficiary of a Living Trust?

September 29, 2021Trust in Indianapolis

For many people, philanthropy is part of their everyday life. If you are someone who believes strongly in charitable gifting, you may wish to continue that charitable gifting in your estate plan. While you can make charitable gifts in your Will, that is often not the best way to do so. Instead, consider using a living trust. The Indianapolis trust attorneys at Frank & Kraft explain how to make a charity the beneficiary of your living trust.

Gifting to Charity Using Your Last Will and Testament

While you certainly can make charitable gifts in your Will, there are several reasons why making charitable gifts in your Will is not the best option. To begin with, using your Will to make charitable gifts means you will almost surely miss out on tax benefits that would otherwise be available when making charitable gifts. In addition, when you make a direct gift in your Will, you lose all control over how that gift is used once the transfer is complete. Finally, gifts made using your Will are not made until after your death. If philanthropy is part of your daily life now, a trust is a much better vehicle for distributing those gifts because it can be used now and after you are gone.

Trust Basics

A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor (also referred to as a Maker or Grantor), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries.  All trusts are first divided into one of two categories – testamentary or inter vivos – the latter of which is more commonly referred to as a living trust. A testamentary trust is a trust that arises upon the death of the Settlor, and which is typically activated by a provision in the Settlor’s Will.  A living trust is a trust that takes effect as soon as all the legalities of creation are in place. Living trusts are then further divided into revocable and irrevocable living trusts.

Making a Charity a Beneficiary

There are several ways in which a charity can be included as a beneficiary of a living trust. You can create a trust that is devoted entirely to charitable gifting or one that includes both charitable and non-charitable beneficiaries, known as “split-interest” trusts.  Specifically, charitable lead trusts (CLT) and charitable remainder trusts (CRT) are specialized trusts that allow you to gift to both charitable and non-charitable beneficiaries within the same trust.

A CLT first makes distributions to a charitable beneficiary for a specific period or for the life of a person. At the end of the designated period, the remaining assets, plus any interest that has accrued, are distributed to the non-charitable beneficiary. For example, you might decide to make an annual gift to a favorite charity for ten years, after which the remaining assets in the trust will be distributed to your children. A charitable remainder trust (CRT) works in reverse with the non-charitable beneficiary receiving distributions first and the remainder (plus interest) going to the charitable beneficiary. The non-charitable beneficiary will receive payouts at least annually for your lifetime, the life of another person, or for a set number of years. With this type of trust, you might provide annual distributions to your adult child for his/her lifetime with the remaining trust assets being distributed to a charity after your child’s death.

Along with allowing you to continue your charitable gifting long after you are gone, including a charity as a beneficiary of a living trust can provide important tax advantages to you while you are still alive.

Contact Indianapolis Trust Attorneys

For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding charitable gifts in your living trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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Paul A. Kraft, Estate Planning Attorney
Paul A. Kraft, Estate Planning Attorney
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
Paul A. Kraft, Estate Planning Attorney
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Trust Administration Steps
To ensure that your estate doesn’t lose assets to federal gift and estate taxes you may need to include tax avoidance strategies in your estate plan. One estate planning tool that can provide tax avoidance benefits is a Grantor Retained Income Trust, or GRIT. Always consult with your estate planning attorney before deciding what tools to incorporate into your estate plan. In the meantime, however, the Indianapolis trust attorneys at Frank & Kraft explain how a Grantor Retained Income Trust works and why you might want to include one in your estate plan. What Is a GRIT? A GRIT is a specialized type of irrevocable trust that allows the Grantor (creator of the trust, also referred to as the “Settlor”) to transfer assets into the trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years, referred to as the “initial term.” Income from the trust is distributed to the Grantor at least annually during the initial term. At the end of the initial term, the remaining principal is either distributed to the trust beneficiaries or remains in the trust for the benefit of those beneficiaries. The primary benefit of a GRIT is that if (this condition is important) the Grantor survives the initial term, the value of the principal held in the GRIT is excluded from the Grantor’s estate for federal gift and estate tax purposes. How Does a GRIT Help with Tax Avoidance? The tax avoidance benefit of a GRIT is found in how the value of the trust principal is determined because those assets are valued at a discount. The value of the discount depends on the length of the initial term of the GRIT, and the applicable federal rate in effect at the time the GRIT is established. The transfer of assets to a GRIT constitutes a gift equal to the total value of the assets transferred to the GRIT, less the present value of the retained income interest held by the Grantor for the initial term. If the Grantor survives the initial term, the assets comprising the GRIT will pass to the designated remainder beneficiaries at a reduced gift tax value. GRIT Beneficiaries Section 2702 of the Internal Revenue Code determines who you cannot name as a beneficiary in a GRIT. Excluded beneficiaries include your spouse, your ancestors or the ancestors of your spouse, any lineal descendant of yours or your spouse, any sibling of yours or your spouse, or the spouses of any of the foregoing persons. You can name lineal descendants of siblings, (nieces and nephews) relatives even more distant than nieces and nephews, or friends of yours or your spouse as beneficiaries of a GRIT. How a GRIT Works in Practice Imagine that you establish a 15-year GRIT and transfer $100,000 of assets into the trust and that the applicable federal rate is five percent. As the Grantor, you will receive the income from the GRIT during the initial term. The present value of the retained income interest is $66,007, making the value of the gift $33,993. If you survive until the end of the initial term, however, the remainder beneficiaries will receive $100,0000 plus all capital growth. Your estate, however, will only need to acknowledge a lifetime gift in the amount of $33,993 (the applicable value of the gift at the time it was made). Disadvantages of Using a GRIT Just like most tax savings tools and strategies, there are some disadvantages to relying on a GRIT. First, it is an irrevocable trust, meaning if your personal circumstances change, you cannot make corresponding changes to the trust. Second, if you do not survive the initial term the advantages gained by creating a GRIT do not apply. Contact the Indianapolis Trust Attorneys For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about establishing a Grantor Retained Income Trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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