Charitable trusts

What is a charitable trust?

A charitable trust or foundation is a legal organisation that can be set up by anyone who has decided that they want to set aside some of their assets or income for charitable causes. Charities can also be formed as companies or unincorporated associations.

You do not need a large amount of money to set up a simple personal charitable trust. Often, the first endowment is a lump sum from a bonus, an inheritance or the sale of shares. But because a charitable trust is a charity, it can receive money tax-free just like any other charity - for example, using Gift Aid or payroll giving. So, a charitable trust may be suitable if you want to give regularly to a number of causes, or if you want to give a reasonable amount as a one-off gift from time to time.

What are the advantages?

Setting up your own trust provides a framework for planning your charitable giving in a systematic and thoughtful way. It may also give you a greater say in how the money you give is directed to the causes you want to support.

Many people involve their family as trustees and find it an enjoyable and constructive way of developing a shared family commitment to giving.

The trust will be able to take advantage of many tax benefits. Apart from the tax relief on your own donations to the trust, it will not pay tax on its investment income. It will not pay corporation tax or inheritance tax, or business rates (there is mandatory relief against business rates at 80% and a further 120% on a discretionary basis) if it eventually runs its own office. Also, unless the trust is very large (and supplying a significant amount of products or services that are subject to VAT - which is unlikely if it is simply a grant-making body), it will not have to register for VAT.

If you are employed, and your employer has a scheme where they will match your donations to charity (perhaps through payroll giving), you may be able to take advantage of this to make your trust even larger.

Trusts are totally independent of the government or any outside control although they will almost certainly be regulated by either the Charity Commission for England and Wales or the Office of the Scottish Charity Regulator. You and the other trustees can decide independently exactly how much you would like each beneficiary to receive. It is simple for them and for you. Your main responsibility is to work within the charitable purposes and the powers set out in the trust deed that governs the trust.

You can choose what to call your trust, so it can carry your family name or that of someone you want to honour, or be totally anonymous. By giving it a personal name, you can give your charitable giving an identity, which can be as flexible as you want. You don't have to include the word 'trust' in the title. You can call it a 'foundation' or 'charity' or any similar term.

The only outside supervision comes from the Charity Commission for England and Wales and the Office of the Scottish Charity Regulator. After the trust registers, it must publish a formal report and accounts each year (including a list of the main organisations it has helped), and must send the Charity Commission a yearly return and report any significant changes. This involves some paperwork but is generally not a huge burden. As long as the trust stays within its own rules, the Commission cannot generally tell the trustees what to do. It is important that the charity continues to be properly administered.

The trust can continue after your death, and may be the beneficiary of a legacy from your estate (which will be tax-free). The trustees will continue to distribute funds according to the guidelines set out in your constitution. This way you can make sure that your favourite causes continue to benefit.

How does it work?

There are several ways of setting up a trust, but the basic model needs:

• a donor or 'settlor' (which may be you, your family or business);

• trustees (who could be you and members of your family, as well as someone outside the family such as your lawyer or a family friend);

• charitable purposes (which set out the type of causes the trust can support); and

• a trust deed (which forms the trust's constitution).

The trustees hold and control the trust's assets. They decide how the income and capital (assets) of the trust should be distributed, and make sure that this is in line with the charitable purposes of the trust.

The charitable purposes or aims describe the sort of causes that the trust can support. These are usually worded in quite a general way so the trustees can keep their options open and allow the areas of interest to develop over time. The charitable purposes must be for public benefit within the purposes that the law regards as charitable, which include relieving poverty, promoting education or religion, or helping the community in many other ways. Within the charitable purposes, a trust can help organisations or individuals. It can operate anywhere in the world unless the charitable purposes restrict it to the UK or a more local area.

The trust deed is the constitution of the charitable trust. It sets out the framework within which the trustees must operate. Apart from describing the charitable purposes the trust has been set up for (which can be general), a trust deed will generally describe:

• the powers and responsibilities of the trustees;

• how they are appointed and removed;

• the approach to investment;

• how the constitution (but usually not the charitable purposes) can be altered; and

• what will happen after the death of the settlor.

Although, with help, it is relatively easy to set up a charitable trust, it can need some effort both at the start and in terms of running costs (which can be paid for out of the trust's own income). Usually your lawyer or accountant will manage all of that, for a fee. Running costs are generally not high, but some trusts have eventually become large enough to make it worthwhile or necessary to employ their own professional staff.

It is impossible to give an exact estimate of set up or running costs. But as a guideline only, if you ask your lawyer to help you to set up a simple trust, it might cost up to £1500 plus VAT. Also, yearly fees from your accountant might be up to £1000 plus VAT. If there is a significant lump sum, there may also be investment management fees.