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What is a 508 Trust?

Is there such a thing as a “508 Trust” or a “Private, Irrevocable, Common Law, Ecclesiastical Trust”?

The short answer is, no.

To be considered “Ecclesiastical”, a nonprofit organization must be a legitimate and compliant church, integrated auxiliary of a church, association of churches, or a convention of churches (also called a “508”). Forming a nonprofit entity that qualifies to operate under Section 508(c)(1)(A) can be complex and is a completely separate entity from a trust and should not be operated under the same entity.

What’s the difference between a Private Trust and a Public Trust?

A public trust, also known as a charitable trust, is an express trust created for a charitable purpose. If an express trust is not a charitable trust, it is deemed to be a private trust. A private trust is an express trust created to benefit a few persons.

Are 508s public charitable organizations or private foundations?

The IRS considers a church, integrated auxiliary of a church, association of churches, or convention of churches (also known as a “508”) a public charity by the nature of their religious and charitable activities. They are automatically recognized as tax-exempt 501(c)(3) charitable organizations if they meet the IRS requirements. 

Among other benefits, this allows 508s to receive federal income tax exemption, tax-deductible donations, and exemption from annual Form 990 filing requirements that cause their accounting and records to be subject to public scrutiny.

On the other hand, a private foundation cannot be tax-exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in 501(c)(3).

All private foundations, whether they have taxable income for, or activity during, the year or not (including nonexempt private foundations, and nonexempt charitable trusts described in section 4947(a)(1) of the Code that are treated as private foundations), are required to file an annual return on Form 990-PF, Return of Private Foundation.

In addition, a private foundations investment income is subject to an excise tax of 1.39 percent, whereas growth of a donor-advised fund is not taxed.

What is the difference between a revocable and irrevocable trust?

There are many different types of trusts, but they all fall into one of two categories: revocable or irrevocable. A revocable trust can be changed at any time by the grantor during their lifetime, as long as they are competent. An irrevocable trust usually can’t be changed without a court order or the approval of all the trust’s beneficiaries. This makes an irrevocable trust less flexible. But, an irrevocable trust can protect trust assets from certain creditors and estate taxes, while a revocable trust cannot.

Does my trust need a Taxpayer Identification Number (TIN)?

Trust accounts are designed to transfer wealth from a grantor (also called a trustor, donor, or settlor) to a beneficiary. There are many types of trusts. Whether a trust needs a TIN depends on the type of trust it is. A revocable, living trust remains under control of the grantor of the trust, and because of this it doesn’t need an TIN. Instead, the trust will use the same TIN as the grantor.

On the other hand, if the trust is an irrevocable trust, it’s no longer under the direct control of the grantor. In fact, the grantor cannot make changes to the trust without the permission of the beneficiaries. These trusts need their own Taxpayer Identification Number (TIN) which would be a nine-digit number called an Employer Identification Number (EIN) assigned by the Internal Revenue Service (IRS). This is because they are a separate entity from the grantor.

Who controls the money in an irrevocable trust?

Generally speaking, once a trust becomes irrevocable, the trustee is entirely in control of the trust assets and the donor has no further rights to the assets and may not be a beneficiary or serve as a trustee.

The grantor forfeits ownership and authority over the trust and its assets, meaning they’re unable to make any changes without permission from the beneficiary or a court order. A third-party member, called a trustee, is responsible for managing and overseeing an irrevocable trust.

Can the trustee and beneficiary be the same individual?

One of the most common questions probate lawyers and estate planners are asked is: “Can a trustee be a beneficiary?” This is because naming a trustee who is also a beneficiary creates potential for conflicts of interest.

In an irrevocable trust, you would be putting yourself at risk serving in two capacities, as both a beneficiary and a trustee.

Based on the advice of our attorney, The 508 Company recommends against this scenario. This is because a trust where the trustee and beneficiary are the same individual are usually not defined as irrevocable. 

“The I.R.S. examined 1.4 million individual income tax returns in 2010, about 1 percent of the total number filed. In 2018, the latest year with available data when Republicans started making these claims, audits decreased to 370,000, or about 0.2 percent… The budget office estimated increasing I.R.S. funding would return enforcement to its 2010 levels. Doing so would result in about 1.2 million more audits; of those, 583,000 would target people making less than $75,000.”

The New York Times, “Fact-Checking the Misleading Claim About 87,000 Tax Agents”, November 6, 2022

“…For example, you educate believers on national issues that are central to their belief in the Bible as the inerrant Word of God. Specifically, you educate Christians on what the bible says in areas where they can be instrumental including the areas of sanctity of life, the definition of marriage, biblical justice, freedom of speech, defense, and borders and immigration, U.S. and Israel relations. The bible teachings are typically affiliated with the Republican party and candidates. This disqualifies you from exemption under IRC Section 501(c)(3).”

Stephen A. Martin, IRS Director, Exempt Organizations, Rulings and Agreements