Charitable trust

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A charitable trust is an irrevocable trust established for charitable purposes. In some jurisdictions, it is a more specific term than "charitable organization". A charitable trust enjoys varying degrees of tax benefits in most countries and also generates goodwill. Some important terminology in charitable trusts includes the term "corpus" (Latin for "body"), referring to the assets with which the trust is funded, and the term "donor," which is the person donating assets to a charity.

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India

In India, trusts set up for social causes and approved by the Income Tax Department not only receive exemption from tax payment, but donors to such trusts can also deduct the donated amount from their taxable income. [1] The legal framework in India recognizes activities such as "relief of the poor, education, medical relief, preservation of monuments and the environment, and the advancement of any other object of general public utility" as charitable purposes. [2] Companies formed under Section 8 of the Companies Act, 2013, for promoting charity, also receive benefits under the law, including exemption from various procedural provisions of the Companies Act—either fully or partially—and are entitled to other exemptions that the Central Government may grant through its orders. [3]

Iran

In the Islamic Republic of Iran, religious charitable trusts, or bonyads, constitute a substantial part of the country's economy, controlling an estimated 20% of Iran's GDP. Unlike some other Muslim-majority countries, the bonyads receive large

United Kingdom

In England and Wales, charitable trusts represent a form of express trust dedicated to charitable goals. There are several advantages to charitable trust status, including exemption from most forms of taxation and freedom for the trustees that is not found in other types of English trusts. [4] For a charitable trust to be considered valid, the organization must demonstrate both a charitable purpose and a public benefit. [5] Applicable charitable purposes are typically divided into four categories: trusts for relieving poverty, trusts for promoting education, trusts for advancing religion, and all other types of trusts recognized by the law. This also includes trusts for the benefit of animals and trusts for the benefit of a locality. Additionally, there is a requirement that the trust's purposes benefit the public or a specific section of the public, rather than merely a group of private individuals. [6]

Several circumstances render such trusts invalid. Charitable trusts are prohibited from operating for profit, [7] and their purposes cannot be non-charitable unless these purposes are ancillary to the charitable goal. [8] Furthermore, it is deemed unacceptable for charitable trusts to engage in campaigns for political or legal change. However, discussing political issues in a neutral manner is permissible. [9] Charitable trusts, like other trusts, are administered by trustees, but there is no direct relationship between the trustees and the beneficiaries. [4] This results in two key points: first, the trustees of a charitable trust have greater freedom to act than other trustees, and secondly, beneficiaries cannot take legal action against the trustees. Instead, the beneficiaries are represented by the Attorney General for England and Wales in their capacity as parens patriae , appearing on behalf of The Crown. [10]

The jurisdiction over charitable disputes is equally shared between the High Court of Justice and the Charity Commission. [11] The Commission, being the primary authority, is responsible for regulating and promoting charitable trusts. It also provides advice and opinions to trustees on administrative matters. [12] In cases where the Commission detects mismanagement or maladministration, it has the authority to take actions against the trustees. This includes their removal, the appointment of new trustees, or even temporarily assuming control of the trust property to prevent harm. [11] In instances where there are issues with a charity, the High Court can implement schemes that dictate the functioning of the charity. [13]

United States

In the United States, many individuals use charitable trusts to leave all or a portion of their estate to charity when they die, both for philanthropic purposes and for certain tax benefits. Charitable trusts can be set up inter vivos (during a donor's life) or as a part of a trust or will at death (testamentary). There are two basic types of US charitable trusts: charitable remainder trusts (CRT) and charitable lead trusts (CLT). Additionally, there is an Optimized Charitable Lead Annuity Trust (OCLAT) designed to maximize the tax and economic benefits for the contributor. [14]

Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates. These "split interest" trusts are defined in §664 of the Internal Revenue Code and are normally tax-exempt. A Section 664 trust makes payments either of a fixed amount (charitable remainder annuity trust) or a percentage of trust principal (charitable remainder unitrust), [15] to either the donor or another named beneficiary. If the trust qualifies under the IRS code, the donor may claim a charitable income tax deduction for their donation to the trust. Moreover, the donor might not need to pay an immediate capital gains tax when the trust disposes of the appreciated asset and purchases other income-generating assets to fund the trust. At the end of the trust term, which may be based on either lives or a term of years, the charity receives whatever amount is left in the trust. [16] Charitable remainder unitrusts provide flexibility in the distribution of income and may be helpful in retirement planning, while charitable remainder annuity trusts paying a fixed dollar amount are more rigid and typically appeal to much older donors unconcerned about inflation's impact on income distributions, and who are using cash or marketable securities to fund the trust. [17] In some situations, the less complicated pooled income fund may be more suitable than the charitable remainder trusts. [18]

Charitable lead trusts are the opposite of charitable remainder trusts and make payments to charity for the term of the trust. Similar to a charitable remainder trust, payments may be either a fixed amount (charitable lead annuity trust) or a percentage of trust principal (charitable lead unitrust). At the end of the trust term, the remainder can either go back to the donor or to heirs named by the donor. The donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift, depending on the type of charitable lead trust. Generally, a non-grantor lead trust does not generate a current income tax deduction, but it eliminates the asset (or part of the asset's value) from the donor's estate. [19]

See also

Related Research Articles

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<span class="mw-page-title-main">Trustee</span> Person holding a position of trust to a beneficiary

Trustee is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility for the benefit of another. A trustee can also be a person who is allowed to do certain tasks but not able to gain income. Although in the strictest sense of the term a trustee is the holder of property on behalf of a beneficiary, the more expansive sense encompasses persons who serve, for example, on the board of trustees of an institution that operates for a charity, for the benefit of the general public, or a person in the local government.

Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170(c) of the Internal Revenue Code as contributions to or for the use of certain nonprofit enterprises.

A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.

<span class="mw-page-title-main">Charitable organization</span> Nonprofit organization with charitable purpose

A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being.

A gift tax or known originally as inheritance tax is a tax imposed on the transfer of ownership of property during the giver's life. The United States Internal Revenue Service says that a gift is "Any transfer to an individual, either directly or indirectly, where full compensation is not received in return."

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Planned giving is an area of fundraising that refers to several specific gift types that can be funded with cash, equity, or property. These gift vehicles are commonly based on United States tax law, but Canada, the United Kingdom, and other nations are beginning to establish similar laws. In the United States the specific rules of planned giving are defined by the United States Congress and the Internal Revenue Service.

A charitable gift annuity is a gift vehicle that falls into the category of planned giving. It involves a contract between a donor and a charity, whereby the donor transfers assets, such as cash or securities, to the charity in exchange for a partial tax deduction and a lifetime stream of periodic income from the charity. When the donor dies, the charity keeps the remaining assets.

The U.S. generation-skipping transfer tax imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren. These people are known as "skip persons". In most cases where a trust is involved, the GST tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level.

<span class="mw-page-title-main">Interest in possession trust</span>

An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust or the right to enjoy the trust assets for the present time in another way. The beneficiary with the right to enjoy the trust property for the time being is said to have an interest in possession and is colloquially described as an income beneficiary, or the life tenant.

<span class="mw-page-title-main">United States trust law</span> Law regulating a wealth-holding legal instrument

United States trust law is the body of law that regulates the legal instrument for holding wealth known as a trust.

<span class="mw-page-title-main">Supporting organization (charity)</span> Legal category of charity in the United States

A supporting organization, in the United States, is a public charity that operates under the U.S. Internal Revenue Code in 26 USCA 509(a)(3). A supporting organization either makes grants to, or performs the operations of, a public charity similar to a private foundation.

A charitable remainder unitrust is an irrevocable trust created under the authority of the United States Internal Revenue Code § 664 ("Code"). This special, irrevocable trust has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets to a non-charitable beneficiary ; and (2) At the expiration of a specified time, the remaining balance of the CRUT's assets is distributed to charity. The trustee determines the fair market value of the CRUT's assets at the time of contribution and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust.

<span class="mw-page-title-main">Private foundation</span> Type of charitable organization

A private foundation is a tax-exempt organization that does not rely on broad public support and generally claims to serve humanitarian purposes.

In the United States, the estate tax is a federal tax on the transfer of the estate of a person who dies. The tax applies to property that is transferred by will or, if the person has no will, according to state laws of intestacy. Other transfers that are subject to the tax can include those made through a trust and the payment of certain life insurance benefits or financial accounts. The estate tax is part of the federal unified gift and estate tax in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.

<span class="mw-page-title-main">Charitable trusts in English law</span> Express trusts dedicated to charitable goals under English law

Charitable trusts in English law are a form of express trust dedicated to charitable goals. There are various advantages to charitable trust status, including exemption from most forms of tax and freedom for the trustees not found in other types of English trusts. To be a valid charitable trust, the organization must demonstrate both a charitable purpose and a public benefit. Applicable charitable purposes are normally divided into categories for public benefit, including the relief of poverty, the promotion of education, the advancement of health and saving of lives, the promotion of religion, and all other types of trusts recognized by the law. There is also a requirement that the trust's purposes benefit the public, and not simply a group of private individuals.

<span class="mw-page-title-main">Cy-près doctrine in English law</span> Doctrine concerning charitable trusts

The cy-pres doctrine in English law is an element of trusts law that deals with charitable trusts. The doctrine states that when such a trust has failed because its purposes are either impossible or cannot be fulfilled, the High Court of Justice or the Charity Commission can issue an order redirecting the trust's funds to the nearest possible purpose. For charities worth under £5,000 and without land, the trustees may decide to redirect the trust's funds. The doctrine was initially part of ecclesiastical law, originating from the Norman French phrase cy près comme possible, but similar and possibly ancestral provisions have been found in Roman law, both in the Corpus Juris Civilis and later Byzantine law.

The Pooled Income Fund (PIF) is a type of charitable mutual fund or charitable trust that pools the securities or cash separately donated by an individual, a family or a corporation to a charity, which is then invested to provide dividends for both the donor's beneficiary and charity. The donations are irrevocable and tax-deductible and must be from personal assets. Capital gains taxes do not apply to securities donated to such a fund. The Pooled Income Fund was created by the Tax Reform Act of 1969 and is governed by IRS Section 642(c)(5).

References

  1. ↑ Section 2(15) read with Sections 11 and 12, Income Tax Act, 1961.
  2. ↑ Section 2(15), Income Tax Act, 1961.
  3. ↑ Section 8, Companies Act, 2013.
  4. 1 2 Hudson (2009), p. 1004.
  5. ↑ Edwards (2007), p. 205.
  6. ↑ Edwards (2007), p. 206.
  7. ↑ Edwards (2007), p. 211.
  8. ↑ Edwards (2007), p. 229.
  9. ↑ Edwards (2007), p. 217.
  10. ↑ Edwards (2007), p. 233.
  11. 1 2 Edwards (2007), p. 236.
  12. ↑ Dollimore (2007), p. 155.
  13. ↑ Edwards (2007), p. 239.
  14. ↑ "The Optimized CLAT: A Compelling Income Tax Deduction Vehicle Hiding in Plain Sight | Estate Planning Journal" (PDF). Retrieved 2022-09-12.
  15. ↑ "26 U.S. Code § 664 - Charitable remainder trusts". LII / Legal Information Institute. Retrieved 2019-04-11.
  16. ↑ "Charitable Trust". Findlaw. Retrieved 2019-04-11.
  17. ↑ "Charitable Remainder Trusts: An Overview | Sjoberg & Tebelius Oak Park Heights, MN". Sjoberg & Tebelius, P.A. Retrieved 2019-04-11.
  18. ↑ Eisenberg, Lawrence J. (9 June 2021). "Maximizing Split-Interest Charitable Deductions With New Pooled Income Funds Over CRTs". kitces.com. Kitces Research. Retrieved 1 September 2023.
  19. ↑ "Charitable Lead Trusts". Fidelity Charitable. Retrieved 2019-04-11.

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