Charitable Trusts vs. Private Foundations: What Is Right for You?

Charitable trusts and private foundations are powerful tools that allow individuals and families to support causes they care about. Both options allow you to create a meaningful legacy and ensure that your charitable giving continues long after you are gone.

But the choice between a trust and a foundation will impact how donations are managed and distributed, as well as your control over your charitable giving. Understanding the difference between the two is key to determining which structure best suits your values, goals, and financial circumstances.

Key Takeaways

• Charitable trusts are ideal for those seeking a more passive approach to giving.
• Private foundations allow more control over giving, with ongoing contributions and potential family involvement.
• Consider your goals, desired degree of involvement, and how you want to structure your philanthropic legacy when choosing between the two.

Understanding Charitable Trusts

A charitable trust is a legal arrangement where assets are entrusted to a trustee, who manages them on behalf of one or more charities. The trust is managed according to its terms, which should outline how the assets will be distributed and which charities will receive the benefits.

Charitable trusts are irrevocable, meaning once they are created and funded, the terms typically cannot be changed.

Types of Charitable Trusts

There are two primary types of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).

Charitable Remainder Trust (CRT) is an irrevocable trust that allows you to donate assets to charity while receiving annual income for life or a specified period, up to 20 years. The remaining assets must be at least 10% of the initial asset value and go to a charity.

Charitable Lead Trust (CLT) is an irrevocable trust that provides income to a charity for a specified period, after which the remaining assets are returned to the donor or their heirs. This trust structure allows the charity to receive regular payments while the donor retains control over the remainder of the assets after the term ends.

“A charitable trust, depending on how that’s set up, can be a certain dollar amount that is paid out to either the charity or to the grantor. There’s so much flexibility there,” said Anna N’Jie-Konte, certified financial planner, founder and CEO of Poder Wealth Advisors.

“You can set it up so there’s an annual amount that is paid out to you as the person who donated property or gave property to that charitable trust and then the remainder of whatever’s left over at the term of the trust, which you decide, gets paid out to the charity of your choosing.”

“Or it could be that the charities are receiving the annual payouts, and you, as the individual or beneficiaries, would receive what’s left,” she added.

Advantages of Charitable Trusts

Charitable trusts offer several benefits:

• Immediate tax deductions, depending on the trust structure and the value of the charitable portion
• Deferral of capital gains taxes, particularly when contributing appreciated assets
• Lower gift and estate taxes, by removing assets from the donor’s taxable estate
• Protection of trust assets from creditors, under certain conditions

Understanding Private Foundations

A private foundation is a type of 501(c)(3) organization, usually created by an individual family or corporation to fund charitable efforts. Unlike public charities, private foundations typically are supported by a single primary source and are overseen by a Board of Directors or trustees.

Types of Private Foundations

The two main types of private foundations are operating foundations and non-operating (grant-making) foundations:

Operating Foundations: These run charitable programs and initiatives, such as managing a museum, research center, or educational facility, and spend a minimum of 85% of their adjusted net income, minimum investment return, on charitable activities.

Non-Operating (Grant-Making) Foundations: These primarily provide grants to other charitable organizations. They are more common among family foundations due to the greater flexibility they offer in selecting charitable recipients and managing giving strategies.

“Family foundations are really set up as a way to get money out, and so they have certain minimum annual amounts or a percentage of their assets that they’re going to have to give on an annual basis, which is 5%,” N’Jie-Konte told Investopedia.

Advantages of Private Foundations

Advantages of private foundations include:

• Maximum control over charitable giving (choices for causes, amounts, and timing)
• Opportunities for family involvement as employees or board members, encouraging a multigenerational philanthropic legacy
• Tax deductions of up to 30% of adjusted income for cash gifts, and 20% for long-term appreciated assets

Key Differences Between Charitable Trusts and Private Foundations

While both approaches support charitable giving, they differ in structure, tax treatment, flexibility, and long-term control.

Legal and Structural Differences

Charitable trusts are governed by trust law with oversight from state courts and the Internal Revenue Service (IRS). They typically have a simpler structure.

Private foundations and nonprofit entities are regulated by the IRS, with stricter reporting requirements and rules, such as the 5% minimum annual distribution.

Funding and Financial Management

Charitable trusts are usually funded once and remain closely tied to the grantor’s finances, offering a simpler, more straightforward approach.

Private foundations can receive ongoing contributions and often manage endowments, allowing for continued giving and more complex investment strategies.

“A charitable trust, while it is a separate entity, is still enmeshed with the client’s personal finances. Whereas a private foundation is a completely separate entity that is going to require a lot more oversight, a lot more management, and, candidly, has a lot more scrutiny,” N’Jie-Konte said.

Flexibility and Control

Charitable trusts offer tax benefits and asset protection but limited flexibility after formation. Private foundations provide greater control, allowing donors to adjust giving strategies over time and involving future generations.

Deciding Factors: Which is Right for You?

The right choice depends on your goals, desired level of involvement, and how you envision your legacy, as well as the tax benefits each option offers.

Personal and Financial Goals

Charitable trusts suit those seeking tax efficiency and a more passive giving role. Private foundations offer greater control and active involvement, often including the family.

“If they really just want to have one or two charities that they really care about and that they really want to support, then setting up a charitable trust may make sense because they can just have that given, like that is predetermined, it’s set, it’s done,” N’Jie-Konte stated.

The amount of money donated will also determine which option is the better fit, as the cost and complexity of setting up either should be worth the commitment.

“The size of the gift makes a big difference. If someone is looking to give $250,000, I don’t think that it makes sense to spend tens of thousands of dollars to have an attorney draft a family foundation, set that up, and get an accountant that is going to be able to help you with the family foundation in terms of the setup and ongoing administration.”

“There’s a lot more overhead that goes into that. And so, if we’re looking at several million dollars that is going to be put into the family foundation, then I think it makes sense to do that,” N’Jie-Konte said.

Tax Considerations

Trusts typically allow for larger upfront tax deductions and help reduce estate taxes. Foundations still provide tax benefits but involve more rules and reporting.

“A charitable trust is usually more of a tax play. If there’s a liquidity event or we’re repositioning assets that may have a low tax basis or cost basis, then that makes a lot of sense because it helps us be a lot more efficient in terms of how we’re disposing of those assets for a client who’s already charitably inclined,” said N’Jie-Konte.

Long-Term Impact and Legacy

Trusts usually follow a set timeline for giving. Foundations can support ongoing multi-generational philanthropy.

“With a family foundation, that is a much more ongoing thing. I typically will see clients who have substantial wealth, ultra-high-net-worth plus, set up a family foundation, and that is typically going to be because they want to have that legacy connection with their children, their grandchildren, and future generations that may not even have been born yet and want to have that family legacy of giving,” N’Jie-Konte explained.

The Bottom Line

Giving back can be one of the most rewarding ways to create lasting change and be true to your values. Charitable trusts and private foundations are tools for giving that offer unique benefits and structures for those committed to philanthropy.

Understanding the distinctions, advantages, and limitations of both allows individuals and families to make informed decisions that align with their financial plans and philanthropic visions. This can ensure that their impact is meaningful and enduring.