Charitable Trusts
Charitable giving and trust planning often go hand in hand.
Charitable Trusts provide individuals and families with the opportunity to support meaningful charitable causes while pursuing broader estate, tax, and wealth planning objectives. Particularly for high and ultra-high-net-worth individuals and families with philanthropic goals, Charitable Trusts can provide settlors with greater direction and control over their charitable planning while also offering asset protection, privacy, and significant tax benefits.
South Dakota’s modern trust laws provide families with a flexible framework for implementing a variety of charitable planning strategies tailored to their philanthropic and financial objectives.
Charitable Remainder Trusts (CRTs)
A South Dakota Charitable Remainder Trust (CRT) exists to support a particular charity or charitable intent. Similar to a Purpose Trust, a CRT provides individuals and families with an opportunity to generate income while ultimately supporting charitable organizations.
The CRT is typically an irrevocable trust and, given South Dakota’s progressive trust laws, including its strong asset protection provisions and no state income tax, its establishment can support both a grantor’s charitable causes as well as their own financial needs.
Creation of a Charitable Remainder Trust
During the creation of a CRT, an individual (the grantor) establishes a trust and transfers assets, such as cash, securities, or real estate, into the trust. The trust then provides income to the named beneficiary (often the grantor or another individual) for a specified period, which can be a fixed number of years or the lifetime of the beneficiary.
After the income period, the remaining assets in the trust go to a charitable organization or foundation, designated at the time of the trust creation. The grantor receives a charitable deduction for the present value of the charitable remainder interest, providing potentially significant tax benefits.
Categories of Charitable Remainder Trusts
There are two primary categories of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). The key distinction between a CRUT and a CRAT lies in the method of calculating the annual payout.
While a CRAT’s payout remains a constant amount or a fixed percentage of the initial trust contribution, never altering throughout the trust term, a CRUT, on the contrary, disburses to the income beneficiary a fixed percentage multiplied by the trust’s fair market value each year for the designated trust duration.
Planning Alternatives
Charitable Giving Through Non-Charitable Trusts
Charitable giving through non-charitable trusts has gained prominence with the evolution of the Directed Trust. Personal non-charitable trusts are now recognized as a popular trust structure that supports effective philanthropy. The dynamics within a Directed Trust, involving beneficiaries, fiduciaries, and trustees, along with active family participation, make it a powerful alternative for charitable giving.
In this context, it is noteworthy that a charitable deduction is permissible for distributions made from non-charitable trusts to support charitable causes. However, it is imperative to incorporate either mandatory direction or discretionary power within the trust to facilitate the allocation of funds to charitable endeavors. Additionally, the utilization of Powers of Appointment (POA) plays a significant role in designating funds for charitable purposes, further enhancing the trust’s potential impact in the realm of philanthropy.
Flexible Giving
Donor-Advised Funds
Combining sophisticated charitable trust strategies with a donor-advised fund can complement an overall wealth plan, providing asset protection and giving individuals and families unique opportunities to design their philanthropic plans for maximum benefits while making a meaningful difference to the organizations and institutions that are important to them.
For a deeper look at donor-advised funds and the broader philanthropic planning process, listen to our conversation with Dr. Thomas Dieters, President of Charitable Gift America.
Questions About Charitable Trusts?
If you would like to learn more about Charitable Trusts, charitable planning strategies, or other planning opportunities available under South Dakota trust law, reach out to us through our contact form or call us at (605) 224-9189.
