SIC 6732 Educational and Religious Trusts
SIC 6732
The charitable trust industry is comprised of companies that manage educational, religious, and charitable trust funds and foundations. The industry also encompasses the trust operations of not-for-profit research institutes.
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Grantmaking Foundations
Charitable giving is closely tied to the economy, and thus when the U.S. economy fell into a recession in 2001, many charitable funds struggled to meet financial goals. Not only did contributions falter, but a depressed stock market led to decreased revenues from investments. In 2001, Americans donated $212 billion to charity, up just 0.5 percent from $210.9 billion in 2000. However, by the mid-2000s the economy had recovered and charities were once again pursuing active strategies to increase funding and reserves. During 2004 giving increased year-on-year by 5 percent to reach $248.52 billion. The largest recipients were religious and educational organizations as well as foundations.
Although banks provided most of the management services for charitable trusts, other institutions were competing with banks in the 1990s and 2000s for control of the endowment management industry. In addition, trust departments at all financial institutions were facing rising management costs, the threat of federal tax laws, which could potentially diminish some benefits associated with charitable trusts, and decreased investment returns resulting from economic recession. Numerous high-profile scandals in the for-profit sector in the mid-2000s prompted increased interest in nonprofits' transparency, and industry braced for more oversight and upgraded regulations.
A trust is defined as a legal relationship in which one party holds title to property for the benefit of another. The arrangement involves the transfer of property by a "trustor" to a "trustee," who manages the property and issues benefits to the "beneficiaries." Although some companies, or trustees, specialize in trust management, most trustees are banks. Beneficiaries of a charitable trust may include any not-for-profit concern, such as churches, research institutes, schools, museums, governments, social or professional associations, and charity organizations.
In addition to cash, beneficiaries may receive such gifts as income-producing property, business inventory or equipment, securities, life insurance, works of art, real estate, or jewelry. Although the trustor typically donates property out of a sense of altruism, the trustee relationship may also provide a trustor with a reduction in tax liabilities. Charitable contributions are also sometimes used as an indirect means of transferring wealth among the trustor's family members, as well as to the beneficiary. A critical advantage that most trusts offer the contributor over other means of gift giving is the control a trustor can retain over the use of the donated property.
A financial institution or trust company acting as a trustee for a charitable contribution assumes many legal duties. A trustee is expected to exhibit skill and care in administration and management of property. It is also expected to be loyal to the beneficiaries and to protect the trust property from outside attack. Other responsibilities include keeping accurate records and reporting to the beneficiary when required to do so by the trustor. Most importantly, the trustee is obliged to carry out the wishes of the trustor in good faith.
Unlike all other forms of trusts, the conditions placed on a charitable trust are usually enforced by the federal government on behalf of U.S. citizens. In fact, the entire trust industry is closely regulated by the federal government. If the trustee violates his trust, by making an unlawful investment for instance, the beneficiary may reclaim the property.
In return for assuming responsibilities associated with trusteeship, the bank or trust company retains compensation from the property based on the amount of assets under management. For many banks, fees from trust services are of vital importance.
Donors used a variety of trusts to transfer their wealth to nonprofit causes in the 1990s. Each type of trust offered different advantages pertaining to the amount of control that the trustor could exercise over the gift, various tax benefits that could accrue to the trustor, and the method of compensation bestowed on the beneficiary.
In a charitable remainder annuity trust (CRAT), a fixed amount of property is periodically distributed to noncharitable parties, often including the grantor of the trust. After a recipient dies, the remainder of the CRAT then goes to a charitable organization. Among other advantages, a CRAT allows the grantor to receive charitable income tax deductions equal to the present value of the remainder interest ultimately received by the charity. These deductions are used to offset income from the trust during the grantor's life.
A wealth replacement trust is used in conjunction with a charitable gift. This complex type of trust is used to replace assets given to a charity while at the same time benefiting specific noncharitable parties, who are often family members of the grantor. The grantor may receive valuable tax benefits related to capital gains, gift, and estate taxes. Furthermore, survivors of the grantor's estate often benefit from reduced inheritance taxes.
Charitable lead trusts distribute income to charitable entities for a fixed term. At the end of the term the remainder of the trust is transferred to a noncharitable beneficiary, such as a spouse or child. One benefit of the charitable lead trust is that the grantor avoids estate taxes on the value of assets that defaults to the beneficiaries.
A pooled income fund is a trust maintained by a...
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