If your estate planning goals include establishing a lasting legacy through charitable donations, aside from making outright gifts (which will make sense for certain people under certain circumstances), your two primary options are: (i) to establish a trust, or (ii) to establish a foundation.
But, how do you choose? And, once you choose, how do you ensure that your charitable motivations will continue to be served after you are gone? These are important questions, and finding the answers starts with gaining a better understanding of the options that you have available.
What Is a Trust?
A trust is a legal arrangement pursuant to which one person (the “grantor” or “settlor”) entrusts assets to another person or organization (the “trustee”) to manage for the benefit of others (the “beneficiaries”). Now, this is an oversimplified definition, and with certain types of trusts (such as the revocable living trust), a single person can serve as grantor, trustee, and beneficiary; but, this provides a good foundation for our discussion of charitable trusts.
Under the right circumstances, establishing a charitable trust can have numerous benefits. Some of these benefits include:
- Tax Savings. By transferring assets to a charitable trust, you can often avoid income, capital gains, and estate taxes that would otherwise need to be paid by you or your estate.
- Asset Protection. Since assets that you transfer to a trust are no longer considered your property, establishing a trust can help shield your charitable gift from the risk of loss, should you face a lawsuit or incur another substantial liability.
- Enhanced Certainty. Most forms of trusts are recognized by state and federal courts around the country, and you can use your trust documents to establish clear rules around your charitable donation. As a result, when you use a trust for your charitable giving, you can feel confident that your final wishes will be carried through.
Of course, the trust structure has certain limitations as well. Among them, when establishing a trust for charitable purposes, the trust will often need to be irrevocable. This means that you will not be able to pull assets back out of the trust should you need to do so in the future. There are costs involved with establishing a trust as well, though these costs will often be offset by the tax benefits involved.
What Is a Foundation?
A private foundation is a tax-exempt organization generally established as either a trust or corporation under state law. Management responsibility rests with directors or trustees, and one of the main distinguishing factors from stand-alone charitable trusts is that private foundations can accept contributions from multiple donors. As a result, private foundations are often used by families seeking to establish a lasting charitable legacy, allowing for family members’ gifts to be pooled and then distributed to outside organizations (or used in-house) at the direction of the foundation.
However, the founders also have the ability to establish permissible donees and assert additional controls over the foundation’s operations as well, making foundations particularly attractive to those who have altruistic goals that they wish for their loved ones to continue to pursue after their death. As a result, whether your hope is to help finance a major international charity, to establish an enduring support fund for a local cause or organization, or even to establish your own operating charitable entity, you can use a private foundation to achieve your goals.
Like charitable trusts, private foundations can offer significant tax benefits for donors and their estates. Donors also have the option (also similar to trusts) to make contributions during their lifetimes, at death, or both.
Types of Charitable Trusts
The two most common forms of charitable trusts are: (i) the “charitable remainder trust,” and (ii) the “charitable lead trust.”
1. Charitable Remainder Trust
With a charitable remainder trust, the grantor establishes the trust and names a specific charitable organization as the trustee. This organization must receive IRS approval, which generally (though not universally) requires a 501(c)(3) designation. The grantor then funds the trust (usually with appreciated assets for tax purposes), and then the charity takes over responsibility for managing the assets as trustee. The grantor has the option to receive either a fixed annuity or a percentage of the trust’s value on an annual basis for his or her lifetime or a period of years; and, upon the grantor’s death, the charity takes possession of the trust’s assets.
2. Charitable Lead Trust
A charitable lead trust operates much the opposite of a charitable remainder trust. With a charitable lead trust, the charity receives income payments for a period of years or the grantor’s lifetime, and then upon the grantor’s death the trust assets transfer to named non-charitable beneficiaries. There is also the option for the trust assets to be redistributed to the grantor prior to death.
Depending upon the grantor’s goals, a charitable lead trust can be structured as any of the following:
- Qualified reversionary grantor trust
- Qualified nonreversionary grantor trust
- Qualified nonreversionary nongrantor trust
- Nonqualified reversionary nongrantor trust
Types of Private Foundations
Private foundations can generally fall into either one of two categories: (i) a non-operating private foundation, or (ii) an operating private foundation.
1. Non-Operating Private Foundation
With a non-operating private foundation, the foundation exists for the purpose of making grants to other nonprofit charitable organizations. Essentially, it operates as an endowment. The foundation may either donate income from its investment activities, donate from its principal, or both; and, as noted above, the founders have the option of limiting the universe of permissible donees – even down to a single charitable organization.
2. Operating Private Foundation
An operating private foundation, by contrast, takes on the role of an exempt charitable organization. Rather than donating its contributions and income to an outside charity, the operating foundation takes on direct responsibility for fulfilling its charitable goals. Many museums, educational institutions, and community centers are operating private foundations, though these foundations can be used for a wide range of other purposes as well.
Choosing Between Charitable Trusts and Private Foundations
Whether it makes sense for you to establish a charitable trust, private foundation, or take another approach to achieving your altruistic goals requires careful consideration of the tax, charitable, and other benefits and limitations each option entails. Forming a charitable trust or private foundation is a major decision, and one that can have an impact on your family and community for generations to come.
You will need to thoroughly weigh your options with the help of experienced advisors, and you will need to be sure that your trust’s or foundation’s organizational documents accurately reflect your charitable and estate planning goals. To learn more, we invite you to schedule an initial estate planning consultation.
Schedule an Initial Estate Planning Consultation at Jiah Kim & Associates
Jiah Kim & Associates is an international estate planning and asset protection law firm that works closely with individuals seeking to establish charitable legacies for themselves and their families. If you would like more information about your options with regard to establishing a charitable trust or private foundation, we encourage you to get in touch. To speak with an attorney in confidence, call us at (646) 389-5065 or inquire online today.
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FAQs
Is trust better than foundation? ›
Compared to charitable trusts, foundations may cost less, face less regulation and have more tax benefits. The Internal Revenue Service recognizes private foundations as charitable organizations under the 501(c)3 chapter of the tax code. This makes the foundations exempt from federal income taxes.
What is difference between trust and foundation in India? ›Whereas a trust is a legal relationship between settlor, trustee, and beneficiary, a foundation is a legal entity more akin to a company. Therefore, it is usually registered in the jurisdiction concerned. Foundations are formed by a founder who provides the foundation's initial assets. This is known as the endowment.
Is trust the same as foundation? ›The terms Trust and Foundation are often used interchangeably. The difference between them is that a Trust is a specific legal entity, whereas a Foundation can be a Trust, a Company limited by guarantee, etc.
What is difference between trust and foundation in Pakistan? ›In terms of responsibilities, for a trust, the trustee has a fiduciary duty towards the beneficiaries of the trust. For a foundation, there is no such duty. However, the founder can keep control of each other's assets endowed to the foundation and the control can be exercised using several tools.
Does a foundation have beneficiaries? ›Foundations have no beneficial owners and are therefore 'ownerless' structures (even where the foundation property is held for the benefit of beneficiaries).
What is the difference between a NHS trust and a foundation trust? ›Foundation trusts have some managerial and financial freedom when compared to NHS trusts. The introduction of foundation trusts represented a change in the history of the National Health Service and the way in which hospital services are managed and provided.
Is foundation a trust or society? ›Foundation is just a word that many NGOs use in there names. For example, some ABCXYZ Foundation could either be registered as a society or as a trust. Foundation is an optional word —you don't have to use it in the name of your organization. If you want, you can use it —if you don't want, don't use it!
What is the difference between an NGO a trust and a foundation? ›From a legal standpoint, there is hardly any difference. An NGO or a Foundation cannot be registered. The legal viewpoint is that an NGO has one of three entities; its either a Public Trust or a Society or a not-for-profit organization or foundation.
What is the difference between a family trust and a family foundation? ›Trusts are easier to set up and don't have a separate legal existence. Foundations are organized as separate legal entities and require filing articles with the secretary of state of the relevant jurisdiction.
How do you create a trust or foundation? ›...
The following elements are essential for the formation of a Charitable Trust:
- An Author or Settlor of the Trust.
- The Trustee.
- The Beneficiary.
- The Trust Property or the Subject Matter of the Trust.
- The objects of the Trust.
Can anyone create a foundation? ›
The first step in establishing a private foundation is to form the organization as either a trust or corporation under state law. Although a trust has fewer requirements for paperwork, record keeping, and filings, it's also a more rigid organizational structure and can typically only be altered by court order.
What do foundations do? ›Broadly speaking, a foundation is a nonprofit corporation or a charitable trust that makes grants to organizations, institutions, or individuals for charitable purposes such as science, education, culture, and religion. There are two foundation types: private foundations and grantmaking public charities.
What is the foundation of trust? ›Trust is in part based on the extent to which a leader is able to create positive relationships with other people and groups. To instill trust a leader must: Stay in touch on the issues and concerns of others. Balance results with concern for others.
What is difference between trust and charitable? ›Charity is the money which you donate. Charitable trust is a TRUST which created to serve the poor/needy.
Do foundations have owners? ›Foundations have neither owners, shareholders, nor members. A board of trustees ensures that the foundation operates appropriately, and is responsible for ensuring that the investments by the foundation are secure and profitable.
Is a foundation a legal person? ›Broadly speaking, a foundation is a self-owning legal entity, separate from its founder, officers and beneficiaries (if any), which has a council or board that is responsible for its administration.
Does foundation have a legal meaning? ›1) In evidence
The basis for admitting testimony or evidence into evidence. For example, an attorney must lay a foundation in order to admit an expert witness' testimony or a company's business records into evidence. Laying a foundation establishes the qualifications of a witness or the authenticity of evidence.
NHS foundation trusts are not-for-profit, public benefit corporations. They are part of the NHS and provide over half of all NHS hospital, mental health and ambulance services. NHS foundation trusts were created to devolve decision making from central government to local organisations and communities.
What are the NHS trust values? ›- Working together for patients.
- Respect and dignity.
- Commitment to quality of care.
- Compassion.
- Improving lives.
- Everyone counts.
The principal purpose of an NHS foundation trust is to provide goods and services for the health service in England; income from these goods and services must always exceed the income from non-NHS sources.
Who controls foundation? ›
The most important one of these is control. Unlike public charities, which are governed by diversified boards of directors, private foundations are independent legal entities controlled exclusively by their donors.
Which is better trust or society for NGO? ›...
Comparison Chart.
| Basis for Comparison | Trust | Society |
|---|---|---|
| Control system | Centralized | Democratic |
| Governed by | Board of trustees | Governing Body which should be directors, governors, trustees etc. |
If one takes the Bombay Public Trusts Act applicable both in Maharashtra and Gujarat, the societies get automatically registered as a trust. If we apply this principle a trust can be treated as a type of society. If trust is treated as a type of society under s.
What is a family foundation trust? ›A private family foundation is a type of private foundation set up by a family, funded with the family's assets and often run by family members who can also participate in its charitable grantmaking.
What are the benefits of a foundation? ›Giving to a private foundation may make it possible for you to: Reduce your income tax for each year in which you make a contribution. Avoid capital gains taxes depending on the characteristics of property contributed. Reduce or eliminate potential estate taxes.
Can you start a foundation with no money? ›One way of starting a nonprofit without money is by using a fiscal sponsorship. A fiscal sponsor is an already existing 501(c)(3) corporation that will take a new organization “under its wing" while the new company starts up.
How many members are required to form a trust? ›While only two individuals are required to form a trust, a minimum of seven individuals are required to form a society. The applicants must register the society with the state Registrar of Societies having jurisdiction in order to be eligible to apply for tax-exempt status.
Do trusts need to be registered? ›Trusts that hold property will, like other trusts, only need to be registered if the trustees incur a liability to tax. Thus, if the property is occupied by a beneficiary – and is not income-producing - no requirement for registration will exist unless a taxable event occurs for IHT, CGT or SDLT purposes.
Which is best NGO or trust? ›An NGO usually aids the government with the programs that they can't usually do in its extent and strength. Trusts, on the other hand, are not dependent on the programs of the government. Trusts have their own policies since they can be public or private trusts.
Is trust the foundation of a relationship? ›“To trust means to rely on another person because you feel safe with them and have confidence that they will not hurt or violate you. Trust is the foundation of relationships because it allows you to be vulnerable and open up to the person without having to defensively protect yourself,” says Romanoff.
What is the difference between trust and fund? ›
The difference between a Trust and a Trust Fund is small but important when it comes to understanding Estate Planning. A Trust is an agreement used to specify how certain assets will be managed and distributed. A Trust Fund is the legal entity those assets are placed into when the Trust is created.
Do trusts give grants? ›In turn, trusts and foundations make grants to support individuals and other charitable organizations to achieve their goals. The terms "trust" and "foundation" are often used interchangeably from a fundraiser's perspective.