A charitable trust is a legal setup where assets are set aside for charitable activities and purposes. This article will explain what a charitable trust is, the types, benefits, tax implications and how to set one up. Whether you’re thinking of setting up a charitable trust or just want to know more, this guide has all the info.
Quick Facts
- A charitable trust is a legally binding arrangement where assets are dedicated irrevocably to charitable purposes and managed by trustees for the public good.
- Charitable trusts have tax benefits including exemption from income, capital gains and inheritance tax so are attractive to donors.
- Setting up a charitable trust involves defining a charitable purpose, drafting a governing document and registering with the Charity Commission to ensure legal compliance.
What is a Charitable Trust?
At its simplest a charitable trust is a legally binding arrangement to support charitable activities. It’s established with irrevocable assets so the resources are dedicated to charitable purposes and can’t be reclaimed by the settlor or their heirs. A key aspect of charitable trusts is they can’t operate for profit or campaign politically, they must be for public benefit activities.
The person who sets up a charitable trust is called the settlor, the trustees manage the assets for the charity. A valid charitable trust must benefit the public, such as relieving poverty, education or advancing religion.
Holding assets for charitable purposes these trusts provide a framework for donors to express their philanthropic intentions and support the greater good through a charity and their own charitable foundation.
Types of Charitable Trusts
Charitable trusts come in many forms, each to meet different philanthropic needs. The most common types are charitable lead trusts and charitable remainder trusts. Charitable lead trusts provide financial support to charities for a set period, then the remaining assets go to designated beneficiaries. This type of trust has no maximum term limit so you can structure payments to be fixed annuity payments or a percentage of trust assets that vary yearly.
Charitable lead trusts provide financial support to charities for a set period then the remaining assets go to beneficiaries. Charitable remainder trusts allow the donor to receive income from the trust for a set period then the remaining assets go to charity. This type of trust is particularly useful for individuals who want to support charitable causes and have a income stream for themselves or their beneficiaries.
Both types of trusts have their benefits and can be structured to suit the donor’s financial and philanthropic goals.
Why Set up a Charitable Trust
One of the main reasons to set up a charitable trust is the tax benefits. Charitable trusts are designed to be exempt from income tax, capital gains tax, inheritance tax, corporate tax and stamp duty. These tax advantages not only make the trust more financially sustainable but also encourage greater giving to charitable causes.
Beyond tax benefits charitable trusts provide continuity of giving, they can operate for many years after the donor has passed away. They also provide credibility and legitimacy for charitable projects, attracting more support from the public and other donors. They are for the public good by funding initiatives that address various community needs.
How to Set up a Charitable Trust
Before: There are several steps to set up a charitable trust to ensure legal compliance and to work. First decide on your charitable purpose which sets the foundation for the trust to operate and comply. Then draft a governing document that outlines the charity’s structure, objectives and operational procedures. Finally register with the Charity Commission to be legally recognised and accountable.
After: To set up a charitable trust and to ensure legal compliance and to work:
- Decide on your charitable purpose which sets the foundation for the trust to operate and comply.
- Draft a governing document that outlines the charity’s structure, objectives and operational procedures.
- Register with the Charity Commission.
Each step is crucial to setting up and running a charitable trust. Clear objectives and a well structured governing document ensures the trust operates within the law and achieves its purpose. Registering with the Charity Commission not only makes the trust accountable to the public but also more trustworthy and credible.
What is Your Charitable Purpose
Defining the purpose of a charitable trust is critical to its operation and compliance. This means identifying specific charitable purposes that align with the law and your personal philanthropic goals. Whether you want to alleviate poverty, promote education or support another cause, having a clear charitable purpose ensures the trust operates within the law and achieves its purpose.
These trusts can be designed to achieve specific charitable purposes so donors can direct their gifts to causes that are important to them. This gives clarity and direction to the trust’s work and helps attract support from like-minded people and organisations.
Governing Document
The governing document is the rulebook for a charitable trust, it outlines the purpose, governance structure and procedures for trustee appointments. It must include the charity’s objectives, structure and operational procedures. This document is critical to ensure the trust operates as defined and complies with the law.
Careful thought and detail is required to draft a good governing document. It should clearly outline how the charity will work, including the management structure and decision making processes. This will provide a clear framework for the trust to operate and maintain transparency and accountability.
Register with the Charity Commission
Registering a charitable trust with the Charity Commission is critical to be legally recognised and to comply with charity law. This registration makes the trust accountable to the public and more trustworthy. The process involves completing the application form and sending it with the required documents to the Charity Commission.
Key documents to register a charitable trust includes the governing document which outlines the purpose of the trust and the rules for its operation. This step not only ensures compliance with the law but also provides a foundation for the trust to operate.
Tax for Charitable Trusts
Setting up a charitable trust can bring tax benefits including exemption from taxes that would apply to personal estates. These tax benefits enables individuals to support charities more effectively and make bigger gifts to charitable causes.
Overall charitable trusts are a good option for donors who want to make more of an impact. The following sections will look at tax in more detail, including capital gains tax exemption, inheritance tax benefits and Gift Aid.
Capital Gains Tax Exemption
Charitable trusts can avoid capital gains tax on the sale of assets so the full value of the proceeds can go towards charitable purposes. When assets in a charitable trust are sold, any capital gains are generally tax free. This means charitable trusts can re-invest the full proceeds from asset sales and be more financially sustainable.
For charitable trusts capital losses are not eligible for relief if the corresponding gain is tax exempt. This means the benefits of charitable trusts are maximised and support long term viability and impact.
Inheritance Tax Relief
Charitable trusts can benefit from inheritance tax relief, often the whole or part of the estate can be tax free. Including charities in your will means you can reduce your overall tax liability and make more of an impact with your philanthropy.
This reduction in inheritance tax liability makes charitable trusts a good option for those who want to support charitable causes while optimising their estate planning. Reducing overall tax and supporting meaningful charitable activity is the double benefit of charitable trusts.
Gift Aid
Charitable trusts can claim Gift Aid on donations, so more money comes to the trust. Gift Aid allows charitable trusts to reclaim basic rate tax on donations, so the donation amount increases without any extra cost to the donor. This scheme adds 25% to eligible donations.
Getting 25% extra on donations through Gift Aid means charitable trusts can increase their income and support their activities and projects. This government scheme is a useful tool for charitable trusts to be more financially sustainable and have more impact.
Running a Charitable Trust
Managing a charitable trust means overseeing compliance, financial reporting and fulfilling the purpose of the trust. Understanding the legal responsibilities of trustees is key to a charitable trust working well.
The following sections will look at the role of trustees, annual income and financial reporting and compliance. Each of these is important to the trust working well and to legal and regulatory standards.
Role of Trustees
Trustees have a fiduciary duty to act in the best interests of the trust and its beneficiaries, to govern properly. They must make informed decisions that consider long term impact and align with the purpose of the trust. This means managing the trust’s resources prudently, not taking excessive risk and using funds properly.
One of the key responsibilities of trustees is to ensure the charity is for public benefit and sticks to its governing purpose. Trustees must act in the best interests of the charity and make informed decisions and avoid conflicts of interest.
Annual Income and Financial Reporting
Charitable trusts must comply with specific reporting requirements based on their annual income including submitting annual returns and accounts. The type of accounts a charity needs to prepare depends on its income and legal structure.
These reporting requirements are for transparency and accountability so you can see clearly how the trust is doing financially and what it is doing. Proper financial reporting is important to maintain public trust and show good management of the trust’s resources.
Compliance
Trustees must ensure the charity complies with its governing document and the law. This means regularly reviewing and understanding charity law and making sure the organisation complies with it.
Complying with statutory accounting and reporting is important to show good management and public trust. Compliance with charity regulations is important to avoid legal trouble and to ensure the trust is doing what the regulations require.
Charitable Trusts vs Other Charity Structures
Different charity structures, including charitable trusts and charitable companies, have different benefits and drawbacks that impact how well they meet your goals. Charitable trusts have specific tax benefits and a structured way of distributing assets which can be good for charitable causes. But they may have less flexibility in governance and operation compared to other models like charitable companies.
The choice between charitable trusts and other charity structures depends on the organisation’s purpose and circumstances as these structural differences can make a big impact on operational effectiveness.
Charitable Company vs Charitable Trust
Charitable companies are corporate entities that can own assets and enter into contracts directly unlike charitable trusts. This gives more governance and flexibility in operation. Charitable companies can have members separate from the trustees so there are additional layers of oversight and management.
On the other hand charitable trusts are subject to various laws and regulations including the Charities Act and the Trustee Acts which outline their legal duties. While this gives a structured way of distributing assets it may also limit operational flexibility compared to charitable companies.
Donor Advised Funds
Donor advised funds (DAFs) are another charity structure that has different benefits compared to charitable trusts. A donor advised fund allows donors to recommend grants without the same governance structure as charitable trusts. This means immediate establishment and lower ongoing management costs so DAFs are a good option for donors who want a simpler way of giving.
Grants from DAFs can be anonymous whereas distributions from charitable trusts require public record keeping. This is a feature of DAFs that gives donors more privacy and flexibility in their giving. But DAFs don’t have the same level of control and direct involvement in charitable activities as charitable trusts do.
Running a Charitable Trust
Running a charitable trust has its own set of challenges that can impede its operation and effectiveness. One of the biggest challenge is managing the growing workload especially for small charities. Defining clear roles and responsibilities among trustees and volunteers can help manage this workload.
Being aware and planning ahead for these common challenges can contribute to the longevity and success of charitable trusts. Other challenges include complying with regulatory requirements, being transparent in financial reporting and getting sufficient funding and resources. Tackling these head on can help the trust run smoothly and do what it’s meant to do.
Conclusion
In summary charitable trusts are a powerful way to support charitable activities and make a lasting difference. They offer tax benefits, continuity of giving, and credibility and public support. Setting up a charitable trust involves several key steps including deciding on the charitable purpose, drafting the governing document and registering with the Charity Commission.
Running a charitable trust requires understanding the legal duties of the trustees, financial reporting and compliance with regulations. While there are challenges in running a charitable trust, planning ahead and good management can overcome these. By using charitable trusts donors can make a real difference to the causes they care about and make a positive impact on the world.
FAQs
What is a charitable trust?
A charitable trust is a legally binding arrangement that supports charitable activities using irrevocable assets, for public benefit and not for profit or political purposes. This means resources are focused on meaningful causes.
What are the types of charitable trusts?
Charitable lead trusts which support charities for a fixed period and charitable remainder trusts which allow donors to keep the income for a period before the remaining assets go to charitable organisations.
What tax benefits do charitable trusts offer?
Charitable trusts have tax benefits such as income tax exemption, capital gains tax exemption, inheritance tax exemption, corporate tax exemption and stamp duty exemption. These benefits not only sustain the trust financially but also encourage bigger donations to charitable causes.
What is the role of trustees in a charitable trust?
Trustees have a fiduciary duty to act in the best interest of the charitable trust and its beneficiaries by managing the assets, ensuring good governance and making informed decisions that align with the purpose of the trust. Their role is key to keeping the trust’s charitable purposes intact and effective.
What are the challenges in running a charitable trust?
Challenges include managing the growing workload, complying with regulations, being transparent in financial reporting and getting sufficient funding. Tackling these head on is key to the trust running smoothly and doing what it’s meant to do.
