How a Charitable Trust Works

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A charitable trust holds assets and distributes them to charities. When you establish the trust you can specify how it will manage and invest its assets, as well as how it will make donations. There are some tax benefits to setting up a charitable trust. However, unless you are particularly wealthy, these tend to be minimal compared to other forms of tax management. In general, the best reason to establish a charitable trust is if you would like to create a long-standing form of charitable giving.

What Is a charitable trust?

Like all trusts, a charitable trust is a legal entity that you create for the purpose of holding and managing assets. The trust is wholly separate from you. It owns any assets it holds, pays taxes and requires management just like any other legally recognized entity.

A charitable trust can specifically help manage charitable giving. It distributes its proceeds and assets to charity based on your instructions, and can do so both during your lifetime and after your death. For this reason charitable trusts are often a significant portion of estate planning. Many individuals will use them to set up ongoing gifts, since a trust can manage these gifts into the future and can even ensure that an initial gift grows over time.

On occasion someone will use a charitable trust to manage real estate or other forms of non-fungible property. For example, say that you wanted to leave your house to the local town to use as a community center. You might set up a charitable trust to hold the house and oversee its use and caretaking even after your death. This is uncommon, however. Most charitable trusts sell off any assets they receive and make their transactions entirely in cash.