Charitable Lead Trust
A charitable lead trust is a type of irrevocable trust. In the proper circumstances, they can help you to reduce your tax liability, provide for loved ones, and support charity. In this article, we will discuss how a charitable lead trust works.
The purpose of a charitable lead trust is threefold. The main purpose is to help with gift and estate tax planning. This type of trust may also be able to provide you with income tax deductions. It does this mainly by means of the second purpose, which is charitable giving. The last purpose is to provide for your beneficiaries without the interference of probate.
How It Works
The workings of a charitable lead trust can be broken into three main steps. These are:
1. Create and Fund the Trust
The first step is to have your charitable lead trust drafted and executed. Once you create the trust you will then need to fund it. You can fund your trust with cash, stock, real estate, and private business interests.
2. Charitable Contributions
In your trust document, you must state a set term during which charitable contributions are to be made. After you fund the trust, the trust must then make contributions no less than annually to at least one qualified charity. This must be done each year until the set term expires.
3. Distributions to Non-Charitable Beneficiaries
After your set term for making charitable donations expires, your trust will then distribute the remaining assets to your non-charitable beneficiaries. For most people, this is typically their children. The distributions to these beneficiaries should be done in a way to minimize or eliminate any transfer taxes.
Charitable Lead Trusts and Taxation
Since the main benefit of creating a charitable lead trust is the minimization or elimination of taxes, let’s briefly consider how it works. The first taxation benefit that a charitable lead trust can accomplish is the reduction of estate taxes. In most cases, any property you fund the trust with is still considered to be a part of your estate. However, your estate will be able to claim an estate tax charitable deduction for the amount paid to charity. This deduction will help to reduce the estate tax burden.
Secondly, the trust can help you to reduce gift taxes. Depending on the language of your trust, you may be able to claim a gift tax charitable deduction during your lifetime. This deduction is calculated based on the value of the current charitable contributions made through your trust.
Is a Charitable Lead Trust Right for You?
Whether or not a charitable lead trust is right for you will depend heavily on your financial and tax standing. Weigh the benefits and drawbacks before creating one and consult with professionals if you are unsure.
Questions? Want to schedule an appointment? Contact us by clicking here.