Charitable Trust Basics

Many clients would like to give a significant amount of assets to charity. While they make donations to charitable causes on a yearly basis, they cannot give the amounts that they would like to because they must make sure that they can provide for themselves and their family. During the safety briefing on an airplane, they tell you to make sure that you put on your breathing mask before you try to help your children with theirs. Giving to charity is similar: make sure that your financial situation is secure, so you can comfortably help others. One way to give to charity while securing your own financial situation is through the use of trusts.

What is a Charitable Trust?

We call using trusts to donate to charity “planned gifting”. This is because, by using a trust, you can control how and when the gift goes to the charity. There are two types of interests in property- an income interest and a remainder interest. The income interest is income generated by the property over a set time period. The remainder interest is what remains after the income interest is complete. A trust can split this interest, either providing you an income stream during your life, and giving the remaining property to charity, or providing the income stream to the charity during your life, and then returning the remaining property back to your estate. These types of split interest trusts, as well as trusts that include both of the property interests, all provide tax benefits if they qualify as charitable trusts.

A charitable trust is a trust that a client creates to serve a qualified charitable purpose. The trust code lists these qualified charitable purposes as poverty relief, the promotion of education, religion, health, government or municipal purposes, or for the general benefit to the community. As the creator of the trust, you can choose to put the specific charitable purpose into the trust document or, alternatively, you can allow the trustee to choose the charitable purpose. You may want to allow the trustee to make the choice if your goal is to be more broadly charitable as it would allow the trustee to respond to current events.

Apart from any tax benefits, there are two lesser benefits to using a charitable trust. One benefit is that a charitable trust can theoretically last forever. Though several states, including New Jersey, have abolished it, the Rule against Perpetuities (RAP) usually stops a person from controlling their property indefinitely. The RAP can be very technical and can invalidate trusts that do not follow its rules. It also usually prevents a trust from lasting more than a couple of generations. Charitable trusts are not subject to the Rule against Perpetuities. Another benefit to the charitable trust is that it defaults to allowing a group of trustees to act by democratic decision rather than by unanimous decision.

Charitable Trust Requirements

Apart from having a charitable purpose, a charitable trust must serve the public at large and therefore cannot have any ascertainable beneficiaries. For example, a trust that promotes education has a valid charitable purpose, but if it does so by paying for your grandchildren’s college, it will not qualify as a charitable trust. The trust can name a class of people as beneficiaries, but cannot name individuals, unless those individuals are going to receive the benefit in order to serve the public at large.

Non-Qualifying Trusts

There are other trusts that do not have ascertainable beneficiaries or have a public purpose, but do not qualify as charitable trusts. The primary reason why these trusts, called benevolent trusts, do not qualify is that they do not fit in the specific categories of charitable purpose listed in the trust code. Another type of non-qualifying trust, honorary trusts, gives the trustee the power to take care of pets or maintain the gravesites of the deceased and their family. If the purposes of these types of trusts are lawful, the law allows them to last up to 21 years.

Protection Against Failed Charitable Trusts

Charitable trusts sometimes are unable to achieve their objectives because of circumstances outside of the settlor’s control; circumstances change, the objective can become moot, illegal or impossible. Since the trust has no ascertainable beneficiaries, once it fails as a charitable trust, it also fails as a private trust. Under common law, when a trust fails, the property in the trust reverts back to the settlor’s estate. When you draft the trust, you can add a gift-over clause, which names a beneficiary of the trust assets should the trust fail within 21 years of the trust’s creation.

Alternatively a court can modify the trust so that it serves a related charitable purpose. The court will look at the settlor’s intent and then decide if a certain alternative is close enough to the original intent that it is better to amend the trust rather than terminate it. Cy pres, as we call this court ability to modify the trust terms, allows the court to modify the disposition of the trust assets and the way to administer the trust. A court can also use cy pres to modify a discriminatory trust or to terminate it.

A related issue with a charitable trust is that, being that there are no ascertainable beneficiaries, once the settlor dies, who makes sure that the trustee keeps their fiduciary duty to the trust? The answer to this question is that interested persons who could possibly be a charitable beneficiary can sue to enforce the terms of the trust.