Staying Legal MI

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Introduction

Trusts are formed for many different purposes, such as making sure that money or other assets goes to a specific person or purpose upon one's death, or ensuring that there are funds to care for a child or incapacitated adult by naming a trustee or successor trustee to disburse funds from the trust appropriately. Then there are charitable trusts. The term charitable trust is sometimes used to refer to a private foundation or a public charity, but here the term is used to mean a trust for the purpose of irrevocably setting aside funds to be given to a charity or a charitable purpose, either during the lifetime or after the death of one or more individuals. The purpose of this page, and website, is to discuss issues that impact charitable trusts. To read about what "charity" and "charitable purpose" mean, go to "What it Means to be a Charity" on the Forming a Charity page of this website.

Forming a Trust

Types of Trusts

There are two types of charitable trusts, charitable lead trusts and charitable remainder trusts (sometimes called split-interest trusts). Both types are described below. Because there are a number of complex tax laws that determine the charitable deductions, and because there a number of legal considerations when forming a trust, it is highly recommended that persons seek the assistance of qualified legal counsel and tax advisors when forming a charitable trust.

Charitable Lead Trust

A charitable lead trust provides benefits or payments to a charity for a certain period of time or until a defined event. Following the end of the specified term, or following the defined event, the trust then provides benefits to a non-charitable entity, possibly the person setting up and funding the trust (the grantor) or a member of the family.

Charitable Remainder Trust

A charitable remainder trust provides a benefit to the grantor or other named beneficiaries until the end of the specified term and then the remainder of the trust assets go to one or more named charitable beneficiaries. A typical charitable remainder trust is set up to provide payments to the grantor, with possible provisions for payments to a spouse upon the death of the grantor, and then, upon the death of the spouse, one or more charities will receive the remainder of the assets of the trust.

What Provisions Should be Included

The advice of legal counsel and tax advisors is highly recommended in forming a charitable lead trust or charitable remainder trust, to ensure the trust is following IRS rules to take advantage of tax benefits. While there are no state forms or state agency where the trust document must be filed when it is formed, it may be subject to Michigan Attorney General oversight as a charitable trust once the trust holds assets.

To assist you in getting started, here are some elements that every charitable trust should include.

The name of the trust, which may reflect the name of the creator of the trust and/or the beneficiaries of the trust assets.
The legal name of the original trustee, including enough information to avoid confusion with other possible trustees.
The names of successor trustees or a detailed description of how the successor trustee(s) will be named.
A statement of the charitable purpose of the trust.

The legal name or names of the charitable beneficiary(ies), with sufficient information to identify the exact charity(ies), such as an address or location, and possibly a charitable purpose to clarify the intent of the grantor.
Rules for administering and distributing the trust assets.
Permission for the trustee(s) or successor trustee(s) to have limited rights to amend the trust, if desired; or limitations on the power to amend. (While the trustee(s) should not have the right to revoke the charitable promises of the trust, they should have power to amend the trust to the extent required to maintain tax exempt status, since rules regarding split-interest trusts change from time to time.)

To find more detailed discussions of forming a trust, including sample trusts, refer to the Other Resources below.

Federal Tax ID Number (EIN)

Once the trust is written and executed (signed), a federal identification number known as the Employer Identification Number (EIN) needs to be assigned to the trust. Every legal entity needs an EIN, whether or not they have employees. The EIN can be obtained immediately either on the IRS website, by telephone (1-800-829-4933), or by mail by submitting IRS Form SS-4. There is no charge for the EIN, regardless of the option chosen. For information on all of these options, go to the IRS website.

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Michigan Attorney General Oversight

Charitable Trust Registration

Michigan's Supervision of Trustees for Charitable Purposes Act

Michigan's Attorney General, through the Charitable Trust Section, administers the requirements of the Supervision of Trustees for Charitable Purposes Act (Charitable Trust Act). Under the provisions of that law, every charity that holds charitable assets must register as a charitable trust with the Charitable Trust Section, unless some specific exemption in the law applies. Assets include cash, funds, investments, real property, or personal property held by the charity. Under the law, they are considered �charitable trusts� because they hold assets in trust for one or more charitable purposes. Because the Act contains no threshold, charitable assets of ANY value that are held in trust are subject to registration. For a discussion of the specific exemptions that apply to charitable remainder unitrusts, see below.

Because split interest trusts are trusts that have assets irrevocably dedicated to charitable purposes, they may be subject to registration. For a more complete discussion of the oversight of the Michigan Attorney General, you may want to read the article �How and Why the Michigan Attorney General Supervises Charitable Trusts� on the Attorney General's website.

To register, a charitable trust complete and submit the following to the Attorney General's Charitable Trust Section:

A copy of the executed trust
Charitable Trust Registration Statement and the Charitable Trust Inventory

e-filing

You may also choose to e-file forms with the Charitable Trust Section by going to the website and clicking the E-Filing link on the Charities section of the Attorney General's website. E-Filing is free of charge for all Attorney General forms.

Charitable Remainder Trusts (Unitrusts)

Under Section 3(c) of the Charitable Trust Act, charitable remainder unitrusts are exempt from registration if all of the following are true:

No charitable interest has yet vested;
The grantor or trustee, or any member of the family of those individuals, have not retained the right to change charitable beneficiaries; and
The charitable beneficiaries are not under the control of the grantor, or trustee, or any member of the families of those individuals. (For example, if the grantor names his or her family foundation as the charitable remainder beneficiary and the grantor is on the board of the family foundation, the charitable beneficiaries are under the control of the grantor, and the trust is subject to registration.)

If the trust fails any of these three tests, then it is subject to registration. For more information on the rules and procedures to comply with Attorney General requirements, go to the charity section of the Attorney General's website.

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Maintaining the Trust

IRS Filing Requirements

Split interest trusts must file IRS Form 5227 (Instructions), although some exceptions apply for charitable lead trusts. The IRS website provides specific information concerning other filings that may be required for split interest trusts.

Annual Charitable Trust Filings

It is only necessary to register one time as a charitable trust with the Charitable Trust Section (CTS); however, there is a requirement to file annual financial accountings with the CTS 6 months following the end of each fiscal year.

The financial accounting requirement may be fulfilled by sending a copy of the report submitted to the IRS. While public charities and private foundations file an IRS 990, 990-EZ or 990-PF, split-interest trusts such as charitable remainder unitrusts and charitable lead trusts may submit copies of IRS Form(s) 5227 and 1041-A. The filing requirement may also be met by sending a copy of a bank trust accounting, or, if the trust is under the jurisdiction of the court, then a copy of the accounting that the trust submits to the Probate Court.

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Other Resources

Links to IRS Bulletins and sample trust language

Online Publication 557 for 501(c)(3) organizations