Charitable lead trusts can be an efficient way to transfer assets to family members, reduce tax liability and make a significant difference in the lives of others by establishing a legacy of giving.
This type of irrevocable trust donates payments to one or more charities for a set amount of time. When that period is over, your beneficiaries receive what’s left.
Funding the trust
A charitable lead trust is typically created during the estate planning process or by will. You can fund it with the following types of assets:
- Real estate
- Types of stock
- Publicly traded securities
- Other complex assets
Funding a trust is complicated, and some assets may have to be sold or combined with cash donations to ensure the trust makes the required charitable payments.
How the trust works
Charitable trusts are complex and subject to certain IRS rules, so it’s advisable to consult an experienced attorney or tax advisor. But in its basic form, the process works this way:
- Fund the trust: Depending upon the type of charitable lead trust you choose, you may receive immediate tax relief when making cash contributions.
- Payments begin: Charitable lead trusts are not limited to 20 years, unlike charitable remainder trusts. There are no required maximum or minimum payments as long as you schedule at least one payment per year.
- Remaining assets distributed to beneficiaries: Once the term expires, the trust’s balance is paid to you or other beneficiaries in a way that minimizes or eliminates transfer taxes.
Tax implications for two types of trusts
Depending upon your charitable, personal and tax planning goals, there are two types of charitable lead trusts:
- Grantor: As the trust owner, you may be able to take immediate income tax deductions. However, that can be offset in that you can be taxed on the trust’s income during its term.
- Non-grantor: This can be a good way to transfer appreciated assets to heirs while potentially reducing estate or gift taxes. However, here the trust owns the assets, and you have no access to them during the life of the trust.
The bottom line is that charitable giving can be a valuable and beneficial part of estate planning for you and a charity you support.