Charitable trusts and foundations are two ways individuals and organizations channel resources to benefit society, but they differ in structure, operation, and purpose. This article explores the key differences between charitable trusts and foundations, their formation, funding, and benefits, helping you to determine which model best suits their philanthropic goals.
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What is a Charitable Trust?
A charitable trust is a legal arrangement where assets such as money, property, or investments are held and protected by a trustee for charitable purposes. Charitable trusts are primarily used to support causes and assist underserved communities.
A trustee of a charitable trust plays a vital role in managing the trust's assets and ensuring they are used properly according to the charitable purposes outlined in the trust deed.
What is a Foundation?
A foundation is a non-profit organization that supports charitable, educational, or social causes by offering grants, or funding programs. The primary goal of a foundation is to support and promote social, educational initiatives, or environmental.
There are two type of foundation, which are:
Private: This is funded by a single source such as an individual, family, or company
Public: Receives funds from various sources, including the government, public, individual donors, and corporations.
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Key Differences Between a Charitable Trust and a Foundation
Formation and Legal Structure
A trust is established when the legal owner of the assets assigns legal ownership of the assets to a person or organization to manage them for the benefit of particular beneficiaries, like family or friends. A foundation incorporates aspects of a business and a trust. It operates as a corporate entity without shareholders, managed by a council.
Funding Source
Trusts are funded by a settlor, an individual or entity that creates them. The settlor transfers the assets such as cash, property, or investments, into the trusts for the trustee to manage them on behalf of the beneficiaries. Foundations have diverse funding models where they receive contributions from different sources, such as individuals, corporations, and government grants.
Registration and ownership of assets
A foundation needs to be registered formally in order to be established legally. It involves filing governing documents, such as a charter or constitution, which define its purpose and structure. While a trust does not need to be registered formally to be valid, it is an agreement between two parties, the settlor (who transfers the assets) and the trustee (who manages them).
Asset Ownership and Management
In a trust, the asset ownership is split among the owners of the assets under the trustee's supervision. This split ensures the trustee acts in the best interest of the beneficiaries. Whereas a foundation does not have such splits. The foundation retains full legal ownership towards the assets, with its council managing them according to the foundation's purpose.
Lifespan and continuity
Trusts usually have a limited lifespan based on the conditions set by the settlor or the law in the jurisdiction. For instance, certain trusts are terminated when the assets are distributed or specific conditions are met. While a foundation can remain for the long term as long as they manage their resources responsibly and adhere to legal requirements because they are corporate entities, This makes the foundation ideal for lasting charitable works.
Types of Charitable Trusts
Charitable remainder trusts
A charitable remainder trust (CRT) enables the settlor to give money to charity while still earning income for a predetermined amount of time. During the trust’s term, the settlor will be receiving regular income from the trust, with the remaining assets transferred to a chosen charity at the end of the trust’s term.
This structure enables the settlor with both an immediate charitable tax deduction and the ability to defer capital gains taxes on appreciated assets transferred to the trust.
Charitable lead trusts
A charitable lead trust (CLT) supports charity causes rather than receiving income. They use the assets to provide support for the charities for a set period of time they choose. The remaining assets will go to the family members when the trustee passes.
A charitable lead trust can be either grantor or non-grantor trust, which can greatly impact the tax treatment. In a grantor CLT, the grantor benefits from an immediate income tax deduction but is liable for the trust’s ongoing income taxes, making it useful for short-term charitable strategies. Conversely, a non-grantor CLT reduces the grantor’s taxable estate, with the trust itself handling income taxes and offering long-term estate planning benefits.
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Types of Foundation
Private foundation
A private foundation is supported by an individual or a corporation. An example of a private foundation is the Bill & Melinda Gates Foundation. They are completely funded by the donations made by the Gates & Warren Buffett family. There is a "payout requirement" for private foundations, which requires them to contribute a certain sum to the causes annually.
Public foundation
Public foundations are grantmaking public charities that get their money from various sources, such as individuals, government grants, foundations, or public entities. They often engage in donations and fundraising events for financial support.
Yayasan Sime Darby (YSD) is an example of a public foundation where they support various charity initiatives. They raise their funds through corporate and public sources, benefiting communities and nonprofit organizations across the country.
Foundations can also be grouped into different categories, such as:
Public charity
Private foundation
Community foundation
Corporate foundation
Independent foundation
Grantmaking foundation
Supporting foundation
Arts foundation
How to Set Up Your Own Foundation
There are two options to set up your own foundation, which are private and public. If you are capable of funding your own foundation, it is best to set up a private foundation. To start your own private foundation, first you need to find acknowledgment from the Internal Revenue Code by filing Form 501(c)(3).
To start your own public foundation, you need to establish it under state law. Then you will need to fill out the IRS Form 1023. Since public foundations are directly accountable to the public and donors, they frequently have to adhere to more strict regulations and transparency standards.
Through public foundations, you will be able to start funding the foundation through fundraising efforts or even collaborations with other NGOs. It is imperative to seek advice and guidance from firms to help you make a good decision.
How do I know if a Foundation is a Public Foundation or a Private Foundation?
Both public and private foundations are intended to help people in need and support various good causes.
But there is a distinct difference between the two, which is how they get the funds. Private foundations acquire their funds from their single benefactor, which could be individuals or businesses.
On the other hand, a public foundation collects funds from the general public through charity events or donations to support their cause.
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Benefits of Charitable Trust
Tax deductions: A charitable trust offers tax advantages. The contributions made to the trust are often tax-deductible, so it reduces the overall tax liability. This enables the trusts to give more to the causes.
Lasting Legacy: Charitable trusts help to expand the philanthropic legacy of the trust through their charity works. The trusts continue to help society even after their lifetime, guaranteeing that their priorities and ideals endure.
Control and Flexibility: The settlor holds full control over managing the assets, specifying how they should be used and even setting conditions for their allocation.
Estate Planning: Involving charitable trusts in real estate planning helps greatly in reducing estate taxes while helping charitable causes.
Benefits of Foundation
Tax Benefits: Any income a foundation earns is tax deductible as long as the funds are used for charitable causes. This helps the foundation give more to the community through their money.
Philanthropic Impact: A foundation makes a lasting contribution to society through their resources. Unlike one-time donations, foundations offer a structured way to support the causes over the long term. By choosing a certain cause and allocating resources properly, it will help to create a sustainable and measurable impact over time.
Perpetuity: Many foundations are made to exist indefinitely, guaranteeing that the philanthropic objectives and donor's vision will endure for many generations. The foundation's assets can increase through business and investments with sound financial management and governance, allowing it to continue funding charitable endeavors for many years to come.
Grant Making Authority: Foundations have the rights to allocate the grants to support various charitable causes activities beyond their own programs. This grand-making authority enables foundations to work with many non-profits, social initiatives, and community organizations.
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Which is Better: A Charitable Trust or Foundation?
The choice between a charitable trust and a foundation depends on the individual's philanthropic goals. Both entities have their equal share of advantages. When choosing, it’s important to consider your goal and where you are most comfortable.
If you are concerned about the financial aspect, foundation could be a better option for you. Compared to trust, foundations cost much less, have fewer rules, and have a lot of tax benefits.
Additionally, foundations are also free from income taxes, as the Internal Revenue Service acknowledges foundations as a charity entity.
In the end, it is crucial to take all the points into account to make an informed decision.
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Frequently Asked Questions
What is a charitable foundation?
A charitable foundation is a non-profit organization created that helps and supports charity causes for people in need. Their primary goal is to help people in need and give back to the community rather than making profits.
Is charity the same as a foundation?
No, charity and foundation are two different entities. A charity is established by a single entity and funded by one private entity, while a foundation relies on government grants and the general public to provide funds to use to support charity causes.
Is a foundation always charitable?
No, a foundation is not always charitable. While the foundations are established to support charity causes, some foundations do serve non-charitable purposes, such as private operating foundations. This foundation focuses on managing family wealth, research, or corporate objectives.
What is the difference between a charity and a charitable trust?
A charity is an organization that supports and addresses various social causes or community needs and is funded by public donations. A charitable trust, on the other hand, is a legal arrangement that manages the resources by trustees for a specific charitable purpose. A charity focuses on services and activities, while a charitable trust manages the assets to support the causes.
What is the purpose of a foundation?
A foundation exists to support various humanitarian causes and serve communities in need. When individuals or organizations establish a foundation, they create a structured way to distribute funds effectively. By carefully distributing funds to projects or groups that support their mission, foundations hope to have a lasting effect.
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