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- Instructions for Creating a Living Revocable Trust
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- The Procedure to Close a Revocable Trust
Giving to charity is an honorable part of an estate plan, but if your plan includes a living trust, it can complicate the picture a great deal. Trusts that include charities as beneficiaries offer several tax breaks. As such, the Internal Revenue Service requires that they be irrevocable.
Revocable Vs. Irrevocable Trusts
The major difference between revocable and irrevocable trusts is that you – the grantor or settlor – retain control and ownership of the former. Although the assets technically belong to the trust, with a revocable trust you still maintain what the IRS calls "incidences of ownership." Irrevocable trusts typically involve naming someone else as trustee and giving up control, both to manage the assets or to dissolve the trust. The government doesn't want you to take back gifts you've given to charities, so if you want to include a charity as your beneficiary, the trust must typically be irrevocable. Charitable trusts allow distributions during the grantor's lifetime, however, so you may still have the benefit of your assets.
Trusts that name both charities and individuals as beneficiaries are split-interest trusts – two separate entities benefit from them. When a charity is involved, the IRS considers the public the beneficiary of this portion of the trust's assets. To further complicate matters, split-interest trusts fall into two basic categories, depending on how distributions are made and who receives them first.
Charitable Lead Trusts
With a charitable lead trust, distributions go to the charity or charities of your choice during your lifetime. The charity receives income, usually annually, and your other beneficiaries receive what remains after completion of these payments. This can happen at the time of your death, or at any other point you specify when you draft your trust documents. For example, you might want the charity to receive payments for no more than five years, leaving an ample estate for your other beneficiaries after that point. If you establish such a trust, you not only avoid estate taxes because the trust is irrevocable, but you can also claim a deduction on your personal income tax return for the amount of your bequest to the charity.
Charitable Remainder Trusts
If you establish a charitable remainder trust instead, the distribution process reverses. Charitable remainder trusts pay their individual beneficiaries first before the remainder of the trust goes to a charity – and you can name yourself as a beneficiary to receive distributions during your lifetime. As with a charitable lead trust, the date at which distributions change from one to the other is up to you. You can also usually take a charitable deduction on your individual tax return for this type of trust.