Understanding The Role Of Charitable Trusts In California

Understanding The Role Of Charitable Trusts In California Lawyer, Glendora City

In this article, you will learn about…

  • The benefits of a charitable trust in California
  • The differences between different types of trusts
  • How trusts can be modified and administered

What Is A Charitable Trust In California?

In California, a charitable trust is a method to reduce taxes and create a benefit for charities and for the donor and their family. It is accomplished by creating an income stream from the asset for a period of time and then a remainder. You would separate the income stream from the remainder and designate one of those for a charity so that you can receive charitable benefits.

What Are The Benefits Of A Charitable Trust In California?

The benefits of a charitable trust are to…

  • convert an appreciated asset into an income stream,
  • have a passive income stream that doesn’t require any maintenance or work,
  • and leverage that income stream to minimize the taxes that are due.

What Are The Different Types Of Charitable Trusts?

There are two different ways that we differentiate trusts. One way is by differentiating between a charitable lead trust or a charitable remainder trust. The second way is to differentiate between an annuity trust and a unit trust.

How Are Lead Trusts and Remainder Trusts Different?

The primary difference between a lead trust and a remainder trust is in how they are allocated to charity.

In a lead trust, the charity receives the income stream for a period of time. At the end of that time, what remains in the trust returns to the donor or their family. A lead trust is more often used for a current taxable issue, such as…

  • A larger bonus that a person has received
  • If a person has sold their business
  • Anything resulting in a person having a larger than usual tax burden for income taxes in the current year

A lead trust allows a person to defer that income and pay taxes on it at a later time or, in some cases, eliminate the taxes altogether.

A remainder trust pays the income stream to the donor or their family for a period of time and then distributes the remainder to a charity.

When the donor has a highly appreciated asset that they don’t want to liquidate because of the capital gains tax burden, they often use a remainder trust to liquidate the asset tax-free. This also generates an income stream from the entire asset.

Some examples of highly appreciated assets could be…

  • Rental Properties
  • Investments

What Is The Difference Between A Unit Trust And The Annuity Trust?

An annuity trust fixes the payment for the income stream at a fixed amount at the time the trust is established. That payment remains the same throughout the payment period.

A unit trust provides that the income that is paid each year is based on a percentage of the value of the trust assets at the beginning of the year.


With the unit trust, if what is being paid out to the income recipient is less than the trust’s earnings, the extra earnings go back into the trust. This increases the value of the trust so that the payments would increase the following year.

Conversely, if the trust earns less, then it’s being paid out, the trust principal would be reduced, and the payments in the future years would decrease.

What Assets Can I Transfer To A Charitable Trust?

There are very few restrictions on assets such as personal property, real estate, securities, or even cash. The only real restriction is that the asset must be unencumbered.

This means that you cannot use an asset as security or collateral for a loan. An example of an encumbered asset would be real estate that has a mortgage on it.

Any asset that the donor owns completely can be transferred fully or partially to a charitable trust.

If the donor has a large commercial property and they want to contribute only a part of the proceeds of the sale to a remainder trust, they could do that by splitting the proceeds into percentages. They would simply retain the remaining proceeds that they did not contribute to the trust.

Can Charitable Trusts Be Modified?

Charitable trusts can be modified in a very limited way. The donor can choose to…

  • Retain the authority to modify and change the successor trustees, and…
  • Maintain the right to change the charities that will receive the charitable portion of the trust

Any charity that the donor names must be a recognized charity under IRS laws.

How Is A Charitable Trust Administered In California?

A charitable trust is administered in California when the trustee, typically the donor, liquidates the assets that are transferred to the trust.

They then take the proceeds from that sale and invest those assets to generate an income stream.

They will then make income distributions each year either to the donor or to the charity and file the appropriate tax returns.

Can IRA Accounts Be Used In Tax-Advantaged Giving?

An IRA account cannot be easily contributed to a charitable trust during one’s lifetime. There are significant restrictions to that which make doing so very difficult.

A charitable trust can be named as the beneficiary of the IRA. At the time of the donor’s death, the IRA would transfer to the charitable trust. It would then be able to pay out to the beneficiaries of the donor for a period of not more than twenty years.

Naming a charitable trust as the beneficiary of an IRA allows the owner of the IRA to leave the IRA assets to their beneficiaries and allows them to defer those taxes for the maximum amount of time.

For more information on Charitable Trusts In California, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (626) 385-6303 today.

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