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Is a charitable trust the same as a QCD?

Charitable giving plays a key role in estate and financial planning, but not all methods work the same way. Two common tools, charitable trusts and Qualified Charitable Distributions (QCDs), offer tax advantages and help support charities. However, they serve different purposes and follow separate legal structures.

What is a charitable trust?

A charitable trust is a legal entity that holds assets for the benefit of one or more charities. There are two main types:

  • Charitable Remainder Trust (CRT): This trust provides income to beneficiaries for a set period before transferring the remaining assets to a charity.
  • Charitable Lead Trust (CLT): Gives income to a charity for a period before passing the remaining assets to non-charitable beneficiaries.

Charitable trusts can reduce estate taxes, provide income tax deductions, and allow for long-term charitable giving. Arkansas law follows the Arkansas Trust Code (Ark. Code Ann. § 28-73-101 et seq.), which regulates how these trusts are established and managed.

What is a Qualified Charitable Distribution (QCD)?

A QCD is a direct transfer of funds from an Individual Retirement Account (IRA) to a qualified charity. Individuals aged 70½ or older can make QCDs of up to $100,000 per year, which can satisfy Required Minimum Distributions (RMDs) without increasing taxable income.

QCDs do not involve the creation of a trust, and they must be made to IRS-approved charities. Arkansas follows federal tax laws regarding QCDs, meaning state residents can use this strategy for tax-efficient giving.

Key differences between a charitable trust and a QCD

  1. Legal structure: A charitable trust is a separate legal entity, while a QCD is a direct IRA donation.
  2. Tax treatment: QCDs lower taxable income, whereas charitable trusts provide deductions and estate planning benefits.
  3. Beneficiaries: Charitable trusts can benefit both individuals and charities, while QCDs only support charities.
  4. Funding: A QCD comes from an IRA, while a charitable trust can hold various assets, including real estate and stocks.

Choosing the right option for charitable giving

Both charitable trusts and QCDs provide tax benefits and philanthropic impact, but they serve different needs. If you want a long-term giving strategy with estate planning benefits, a charitable trust may be a better fit. If you are looking to reduce taxable income while fulfilling RMD requirements, a QCD could be the right choice.