Charitable Trust vs. Foundation: Key Differences

The head of a foundationCharitable trusts and foundations can be used to both secure personal, family or business assets and enable philanthropic endeavors. Each one provides assets, such as securities, with protection from lawsuits and other claims. Trusts and foundations also can offer significant tax benefits as well as privacy. Charitable trusts are easier to set up and provide more privacy. Foundations are incorporated as separate legal entities. Many well-known charitable organizations are set up as foundations or charitable trusts. Here’s an overview of each one and how they compare.

A financial advisor can help you pick the most appropriate ways to do estate planning.

Charitable trusts and foundations can be funded with almost any type of asset. Funds may be provided by cash and bank accounts, stocks and other securities, homes and other real estate, proceeds from life insurance policies, business ownership interests and collectibles.

Charitable purposes are just two reasons to set up trusts and foundations. These tools can also be used to help with succession planning and business continuity, to protect minors and other vulnerable beneficiaries and to shield assets from divorce claims. The tax benefits and privacy benefits of trusts and foundations can apply to all these uses as well.

Foundation Basics

Collecting food for donations

A foundation is a private nonprofit organization devoted to charitable purposes. The cash, securities, real estate or other assets used to fund the foundation can come from an individual, a family or a business. Once assets are transferred to the foundation, they no longer belong to the founder or founders. A foundation charter lays out the purpose and intended activities of the foundation.

The assets in the foundation typically fund grants to other nonprofits. A board of directors decides which grants to give money to and otherwise oversees the activities of the foundation. Compared to charitable trusts, foundations may cost less, face less regulation and have more tax benefits.

The Internal Revenue Service recognizes private foundations as charitable organizations under the 501(c)3 chapter of the tax code. This makes the foundations exempt from federal income taxes. Individuals and corporations can get tax deductions by making contributions to private foundations. Private foundations may have to pay excise tax on net income from investments, however.

Charitable Trust Basics

A charitable trust gets created when a grantor gives a trustee title to some property or assets. Many types of trusts exist and other types, such as living trusts, are widely used for estate planning, wealth transfer and other purposes. The designated beneficiaries of charitable trusts may be particular groups of people, such as disabled veterans.  Charitable trusts have been around longer and are more widely used than foundations.

Unlike foundations, charitable trusts are not separate legal entities. Creating a trust requires filing no articles of incorporation or other documents with the secretary of state or other agency. Because of that, trusts are particularly good for maintaining privacy.

The document that organizes a trust is known as a trust deed. It describes the beneficiaries and instructs the trustee how to use the assets of the trust to benefit the designated beneficiaries. Trusts may award scholarships to individuals, grants to charitable organizations or otherwise use assets to help beneficiaries. The trustee decides how to use the assets in accordance with the trust deed, and the original grantor may have limited ability to direct the trust’s actions.

Like foundations, contributions to charitable trusts can be deducted for income tax purposes by individuals and businesses. The IRS otherwise treats charitable trusts like foundations, requiring them to pay excise taxes on investment income, unless the charitable trust is classified as a public charity.

Bottom Line

Little girl holding a "thank you" signCharitable trusts and foundations both provide asset protection, tax benefits and privacy to wealthy individuals, families and businesses. They can be used in estate and succession planning and as a way to support selected causes and charities using assets transferred from an individual, family or business. Trusts are easier to set up and don’t have a separate legal existence. Foundations are organized as separate legal entities and require filing articles with the secretary of state of the relevant jurisdiction.

Tips on Estate Planning

  • A qualified and experienced financial advisor can assist you in evaluating your unique situation when making the decision between a charitable trust and a foundation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re concerned with the impact of taxes on your retirement income, you may want to consider where you spend your golden years. Check out our rundown of the most tax-friendly states for retirees.
  • Consider a charitable remainder trust. It’s an irrevocable trust to which you contribute assets. You or a chosen beneficiary can then use the resulting stream of income. The remainder of the funds go to charity or charities of your choice. Placing assets in a charitable remainder trust reduces your individual taxable income.

Photo credit: ©iStock.com/Minerva Studio, ©iStock.com/Vladimir Vladimirov, ©iStock.com/SDI Productions

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Source: smartasset.com

10 Things First-Time Car Buyers Should Know

If you're thinking about buying or leasing your first car, you may not know exactly where to start. While you may want to head straight for a dealership, that's typically not the best first move.

In this post, we'll cover ten things first-time car owners need to know about the pros and cons of buying versus leasing, how to get the best deal possible, and ways to pay for your new ride.

1. Never go car shopping until you know what you can afford. 

Before you start shopping for a car, it's critical to decide how much car you can afford. A good rule of thumb is to keep your car payment at no more than 10% of your net pay. So, if your take-home pay is $3,800 per month, your car payment shouldn't exceed $380.

You can get help crunching the numbers by using a Car Loan Payment Calculator. Input different terms and loan amounts to see how it affects your payment. But remember that you'll also have other expenses to cover, such as fuel, power, insurance, and maintenance not covered by a warranty.

ALSO READ: 8 Best Budgeting and Personal Finance Tools

2. Your credit plays a significant role in your monthly payment.

Once you have a price range in mind for your vehicle, checking your credit is a good idea. Auto lenders rely on credit when setting your loan's interest rate offer. The better your credit, the lower your interest rate will be.

If you have no or poor credit, you may get turned down for a loan or get quoted a relatively high interest rate. With a higher interest rate, you'll have higher monthly payments. That means you may need to buy or lease a less expensive vehicle or save up enough cash to avoid taking out a loan altogether.

Auto lenders rely on credit when setting your loan's interest rate offer. The better your credit, the lower your interest rate will be.

And if you have good or excellent credit, you'll qualify for competitive interest rates and lower monthly payments. So, if your credit isn't in good shape right now, it's worth waiting to get a car loan or lease until you build or rebuild it.

3. Car reviews are critical to consider.

While you might be dreaming about buying or leasing the best-looking car, be sure to browse reviews on popular automotive sites. Vehicles have different ratings based on features such as safety, reliability, resale value, gas mileage, recalls, and handling.

Make sure a potential vehicle will fit your priorities, such as having enough room for the entire family, being comfortable on long trips, or compact enough for city driving. In general, the longer you can keep a car, the better. So be as mindful of your current and future driving needs as possible.

Compare features and prices of different makes and models that interest you and build a test-drive list. If you're considering a used vehicle, look up their values at online sites like Kelly Blue Book and Edmunds.

4. Research car loans to find the best offer.

To get the best rate on a car loan, you need to do your homework. While you can apply for dealership financing, check with your bank or credit union first to see what APR you can get.

Credit bureaus don't penalize your credit when you're shopping around and comparing rates for a new credit account.

Also, shop and compare car loan interest rates using online lenders. To save the most money on finance charges, shop for the shortest loan term you can afford, which reduces the amount of time you pay interest.

As I mentioned, if your credit is poor, you may be able to get a car loan, but at a higher cost. You may find that credit unions are more lenient than traditional banks and will offer more competitive loans even when you have poor credit. However, you must be a member to use their services.

Credit union membership requirements vary depending on the institution and sometimes can be as simple as making a one-time, low-cost donation to a charity supported by the credit union. To find one, check out Finder.com's list of the best credit unions or visit ASmarterChoice.org.

Once you're ready to buy a car, get a loan pre-approval. You must submit personal information such as your Social Security number and salary information so the lender can review your credit and financial history. If you get preapproved, you'll know the maximum amount you could borrow and your interest rate. 

If you're worried that multiple hard inquiries from lenders will hurt your credit, don't be. If the inquiries occur within a short period, such as two to three weeks, they typically get treated as one inquiry. In other words, credit bureaus don't penalize your credit when you're shopping around and comparing rates for a new credit account.

5. Always avoid getting upside down on a car loan.

Within the first year of ownership, the average new car depreciates about 20%. If you take out a loan and end up owing more than the car is worth, that's called being "upside-down."

Consequently, if you decide to sell the car before paying it off, you'll have to make up any difference between the sales price and the remaining loan balance. So, no one wants to be upside down on a car loan and owe more than it's worth.

To avoid getting upside down, you can pay a larger auto loan down payment, such as 20% or more. For instance, if a car costs $40,000, try to put down $8,000. In addition to giving you more vehicle equity, it reduces your monthly payments or allows you to shorten the loan repayment period.

Also, consider buying a vehicle that holds its value, so it's worth more if you decide to sell it. And if you can pay cash for a car, you'll avoid owing years of interest payments on an auto loan. That could save you thousands of dollars, depending on your loan amount and rate.

6. Understand the differences between buying and leasing a car.

When you lease a car, you sign a contract that allows you to drive it for a period, such as three or four years. It's less common than buying but has become more popular with the rising cost of vehicles.

You never build equity in a lease deal, so you don't need to make a large down payment like a car loan. Any down payment you make should be the minimum amount, which is typically 10%.

For instance, say you lease a $45,000 vehicle that will be worth $20,000 in three years when your lease expires. The $25,000 depreciation, minus any down payment, is used to calculate your monthly lease payments.

So, instead of paying a retail price, you only pay for the estimated depreciation of a car during a lease. That's why it costs less to lease a vehicle than to buy it.

Other than depreciation and any down payment, other factors that determine the monthly payment on a lease include the:

  • Lease term
  • Vehicle's retail price
  • Your credit
  • Dealer fees
  • State and local taxes

Like with a car loan, the better your credit, the better your terms will be. If you have poor credit, you may have to pay a larger down payment and monthly lease payments.

Since not all cars depreciate equally, it's always best to lease a vehicle that holds its value.

Since not all cars depreciate equally, it's always best to lease a vehicle that holds its value. Edmunds and TrueCar are good resources for researching vehicle prices and depreciation rates. At the end of your lease contract, you can return the car to the dealership or opt to purchase it for its depreciated value, also known as the residual value.

Here are the pros of leasing a vehicle:

  • It's typically more affordable than buying
  • Major repairs are covered (unless your lease exceeds the warranty)
  • You can drive a new car with the latest safety features every few years
  • You avoid the hassle of trading in or selling a vehicle

But consider the following cons of leasing:

  • You don't build equity
  • You must pay for damages or excessive wear and tear when the lease ends
  • You must pay for mileage overages, such as if you drive more than 10,000 to 12,000 per year
  • Breaking a lease comes with hefty fees 

While leasing can be a wise move depending on your finances, goals, and lifestyle, let's review the pros of buying a car.

When you own a vehicle, you can:

  • Customize it
  • Trade it for another vehicle
  • Sell it
  • Drive it as much as you like
  • Pay off a loan and continue to drive it

Some cons of owning a car include:

  • Making a down payment is typically required
  • Paying higher monthly payments compared to leasing
  • Getting upside down on the loan 
  • Being responsible for repair costs after a warranty expires

7. Buying a used car requires due diligence.

You may decide that you don't want to buy a brand-new car. Getting a used vehicle that's already depreciated can be a great way to save money. Many dealers offer certified pre-owned or CPO vehicles. They've been thoroughly inspected, have low miles, and carry an extended manufacturer warranty.

If you buy a used vehicle from a dealer, they may provide a free car history report. However, if you buy a car from an individual, be sure to purchase a vehicle history report using a site like Carfax or AutoCheck. Look for discrepancies in what a dealer or private party reports about a vehicle and consider them red flags.

Also, always have a car sold by an individual inspected by an outside mechanic before buying it. It might cost a few hundred dollars but is worthwhile if a mechanic uncovered a potentially costly issue.

8. Expect to negotiate your car purchase or lease.

Whether you decide to lease or purchase your first vehicle, you should expect to negotiate the deal. Remember that just because you got preapproved for a specific loan amount doesn't mean you should spend the maximum.

Use these tips to get the best purchase deal possible:

  • Focus on the price of the car, not the payment. If the car salesperson asks what you want your monthly payment to be, tell them that you only want to discuss the car's purchase price.
     
  • Bring information about the best purchase price you found for a vehicle. Show the salesperson your research and say, "If you can beat this price, I'm ready to make a deal."
     
  • Know the trade-in value of your vehicle. If you have a car to trade in for a purchase, make sure you have a reasonable price in mind so a dealer can't offer too little.

Here are some tips for negotiating the best auto lease:

  • Focus on the total cost of the lease, not the payment. The gross capitalized cost is the amount you pay for a lease. The salesperson may ask you what payment you would like, but like with buying a car, the entire cost matters.
     
  • Ask for a higher mileage allowance. Remember that if you exceed a lease's mileage, you'll have to pay an overage fee. So, try to negotiate extra miles for free.
     
  • Request a lower interest rate. Don't be afraid to push for a lower interest rate to save money if you have excellent credit.
     
  • Ask to waive future fees. The dealer charges a disposition fee when you return a car at the end of a lease. Ask them to waive it to sweeten the deal.
     
  • Discuss the buyout price. If you're considering buying a vehicle at the end of a lease, let the salesperson know. It's possible to negotiate a lower price than the anticipated market value of the car.

9. Understand what it means to cosign a car loan or lease.

If you can't get approved for a car loan or lease on your own, consider asking a family member or friend with good credit to cosign for you. Be aware that the loan or lease payment history gets reported on both your credit reports. So, making payments on time benefits both your credit scores.

However, if you fail to make payments on time, it damages both your credit scores. And if you default on a loan or lease, the lender will hold both of you responsible for the entire debt. So cosigning is a financial move no one should take lightly.

10. Shop for auto insurance as soon as possible.

If you already have car insurance, update the coverage as soon as possible after buying or leasing a car. Most policies include a grace period, such as 30 days, when any new, used, or leased car is covered automatically. Since your vehicle make and model affect your auto insurance premium, your rate could go up or down.

However, when buying or leasing your first car, you must purchase auto insurance before driving your new car home. Since you don't have a retroactive grace period, driving without insurance would put you at serious financial risk.

If you buy or lease a car from a dealership, it may offer guaranteed asset protection (GAP) insurance. It pays the difference between the amount you owe on your loan or lease and the value the insurance company places on your car. In other words, it protects you from the financial risk of being upside down on a vehicle.

Once you've reached a deal, signed the paperwork, and have insurance, take the keys and enjoy your new car!

Source: quickanddirtytips.com

Estate Planning: Can You Sue a Trust?

Courtroom during a civil procedureTrusts can provide certain benefits for estate planning, including asset protection. But can you sue a trust? It’s an important question to ask if you have a trust or plan to create one, are named as the beneficiary to a trust or are owed debts by someone who’s established a trust. While a trust itself generally cannot be sued, the trustee can. Understanding when a lawsuit can be brought in connection with a trust is important for estate planning. Of course, getting estate planning help before you decide on a trust can preempt litigation later on; that’s where a financial advisor can be immensely helpful.

Trust Basics

A trust is a legal entity that holds and manages assets on behalf of one or more beneficiaries. The individual or entity responsible for managing those assets is called a trustee. Trusts can be revocable, meaning they can be changed or altered, or irrevocable, meaning the transfer of assets to the trust is permanent.

Trusts can be used in estate planning as a way to manage assets during your lifetime and beyond. Different types of trusts can be established for different purposes. For example, a special needs trust can be used to provide financially for the care of a special needs beneficiary. Charitable remainder trusts can be used for charitable giving.

Can a Trust Protect me From a Lawsuit?

The answer is that it depends. Say, for example, you have outstanding debts and are at risk of being targeted by a credit lawsuit. Whether you have a revocable or irrevocable trust can determine whether or not the trust can be sued.

With a revocable trust, you technically still own the trust assets. Even though they may be held in trust on behalf of your spouse, children or other beneficiaries, they belong to you as long as you’re living. In the case of creditor lawsuits, a creditor may be able to sue a revocable living trust for the collection of unpaid debts.

Irrevocable trusts are a different matter. When you transfer assets into an irrevocable trust, you give up ownership or control over them. That makes it difficult for a creditor to sue the trust and try to claim those assets since they technically no longer belong to you. Irrevocable trusts that are established specifically for the purpose of shielding assets from creditors are sometimes referred to as asset protection trusts.

It’s important to keep in mind, however, that creating an irrevocable trust for the purposes of avoiding creditors could become problematic. If a court determines that you created the trust fraudulently, the ruling could go against you which may leave your assets open to creditor lawsuits.

Can You Sue a Trust Directly?

Generally, no you cannot sue a trust directly. Again, that’s because a trust is a legal entity, not a person. It’s possible, however, to sue the trustee of a trust whether that trust is revocable or irrevocable. As mentioned, in the case of a creditor lawsuit the trustee of a revocable living trust could be sued. If you named yourself as the trustee of your revocable living trust, then you could face a lawsuit for debt collection.

You could also be sued as the trustee in connection with other types of civil lawsuits. Say, for example, that you transfer your vehicles into a revocable living trust. While driving one of those vehicles you cause an accident that results in the injury or death of another driver. The driver or their family could sue the trust for damages indirectly by suing you as the trustee.

When Can You Sue a Trustee?

Lawsuit documentsTrustees bear a significant responsibility with regard to managing trust assets. They’re bound by fiduciary duty to manage the trust assets according to the wishes of the trust grantor and in the best interests of the trust beneficiaries.

So can you sue a trust if you believe the trustee is not carrying out their fiduciary duties? Yes, it’s possible. For example, say you’re a beneficiary of your deceased parents’ trust. You know that under the trust terms you’re supposed to receive a certain amount of money but the trustee has yet to make the payment. You could bring a lawsuit against the trustee for breach of fiduciary duty.

Likewise, trustees are prevented from self-dealing or using trusts assets for their own benefit. If you believe something like this is going on behind the scenes or that the trustee is actively stealing money from the trust, you could sue. You’ll need to be able to provide that the trustee has committed a serious breach of fiduciary duty.

Here are some other scenarios that might allow you to sue a trustee:

  • You believe they acted negligently which resulted in financial harm to the trust or to its beneficiaries
  • A conflict of interest exists that allows the trustee or someone they know to benefit financially
  • The trustee is not acting impartially and instead appears to favor certain beneficiaries over others
  • Assets are being withheld without any reasonable explanation from the trustee

If you believe you have grounds for a lawsuit against a trustee, you may want to talk to an estate planning attorney or a trust litigation attorney.

Suing a Trust vs. Contesting a Trust

Suing a trust and contesting a trust are not exactly the same. When someone sues a trust, it’s typically related to a specific claim for damages. So with a creditor lawsuit, for example, the creditor is trying to win a financial judgment to recoup money owed toward outstanding debts. When someone contests a trust, they’re challenging the terms of the trust itself.

Why would someone contest a trust? There are different reasons for doing so. For example, you might contest a trust if you:

  • Believe that the trust grantor was coerced or otherwise subjected to undue influence in creating the trust
  • Suspect that any unusual amendments made to the trust may be linked to financial elder abuse
  • Think trust documents have been forged or fraudulently altered
  • Otherwise believe that the trust is invalid in some way

You can contest a trust if you feel that you should have been included as a beneficiary or that you should receive a larger share of trust assets. But keep in mind this alone may not be enough to get a court to agree and force a change of the trust terms. Typically, there has to be a valid suspicion that the trust is somehow in violation of your state’s estate planning laws for a contest to be successful. You must also have legal standing to bring a claim, i.e. be recognized as an heir of the trust grantor.

Again, talking to an estate planning attorney or a trust litigation attorney may be helpful if you’re considering contesting a trust. An attorney can help you figure out if you have grounds to contest a claim and what you’d need to prove that claim in court.

The Bottom Line

One mountaineer offering a helping hand to another

Can you sue a trust? No, not directly, is the answer. But it is possible for a trustee to be sued in the case of creditor lawsuits brought against revocable trusts or lawsuits related to breach of fiduciary duty. Establishing a trust could help you to round out your estate plan but it may be helpful to talk to an estate planning attorney about what you need first and how a trust can protect your assets.

Tips for Estate Planning

  • Consider talking to your financial advisor about whether a trust is right for you as part of your overall financial plan. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Will you have enough money to retire comfortably? SmartAsset’s free 401(k) calculator can help you determine whether you’re on track to retire on time.
  • A trust is not a substitute for a last will and testament. If you don’t have a will, you may want to consider drafting one to avoid the risk of dying intestate. You can use a will to decide how your assets will be divided and name guardians for minor children. It’s easy to create a will online thanks to affordable will-making software programs. Some also make it easy to establish a simple trust though again, you may want to get advice from an attorney first.

Photo credit: ©iStock.com/gorodenkoff, ©iStock.com/Ulf Wittrock, ©iStock.com/AscentXmedia

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Source: smartasset.com