Charitable Trusts Part II: Charitable Lead Trusts

Funding a charitable trust can help you provide financial support to the charitable causes you care about, as well as pursue personal financial objectives. We are highlighting two types of charitable trusts – the charitable remainder trust (which was covered in Charitable Trusts Part I) and the charitable lead trust.

Each type of trust operates quite differently from the other and is used to achieve different objectives. If you are interested in retaining an income from the assets you donate, then a charitable remainder trust may be the one for you. If you are looking for specific tax benefits, such as the ability to transfer assets to your children at a reduced gift or estate tax cost, then a charitable lead trust may be a better choice. The two types of trusts have one thing in common: There are significant costs associated with setting them up and running them so usually the charitable gift must be sizable in order to justify the expense.

Charitable Lead Trust

A charitable lead trust enables you to make a sizable gift to charity and potentially provide for your heirs at a reduced gift and estate tax cost.

As mentioned previously, charitable lead trusts work differently than charitable remainder trusts. Instead of you receiving the income and the charity receiving the remainder, the charity receives the income for a period of years and then you or your beneficiaries, such as your children, receive the amount remaining in the charitable lead trust.

There are several types of charitable lead trusts, each designed to meet different objectives. The two main types are the grantor lead trust, which returns the remainder to you, and the non-grantor lead trust, which transfers the remainder to your non-charity beneficiaries. We’ll focus on the non-grantor lead trust, the type used to minimize gift and estate taxes on the transfer of wealth.
Let’s say you have a large taxable estate and that you want to pass assets to your children at a reduced gift and estate tax cost. If you are charitably inclined and willing to wait several years for your children to receive your gift, you might establish a non-grantor charitable lead annuity trust and irrevocably transfer cash, securities, or other assets to it.

You receive a charitable gift tax deduction for a portion of the assets that you transfer to the trust. The deduction is equal to the “present value” of the charitable income payments. The “present value” of the remainder is subject to gift tax, although you may avoid the tax by using part of your federal gift tax exclusion.

How large a deduction might you receive? The answer will depend on the trust term you choose, the payout rate you choose, and the IRS discount rate in effect at the time the trust is created. A longer trust term, a higher payout rate, and a lower IRS discount rate will result in a larger deduction.

Once you transfer the assets to the trust, they are no longer part of your estate, which lowers your future estate tax liability. And because the assets are no longer part of your estate, any potential appreciation in their value during the term of the trust, if not used for charitable annuity payments, can be distributed gift and estate tax-free to your children when the trust terminates.

Now may be an especially favorable time to create a charitable lead trust. The IRS discount rate has been very low recently – and the lower the rate, the higher the deduction you receive for funding a charitable lead trust.

Charitable lead trusts are complicated. Copper Leaf Financial can help you determine if one is right for you. Given the right circumstances, you may be able to transfer significant wealth to your heirs at a reduced gift and estate tax cost and provide considerable financial support to your favorite charity for many years.

With offices in Williston and Rutland Vermont, Copper Leaf Financial is a Registered Investment Advisor (RIA) dedicated to holistic, transparent, evidence-based advice. We are a fiduciary, fee-only firm serving clients with objectivity and integrity on all financial planning areas including charitable giving for more than 25 years. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.

See Also: “Charitable Trusts Part I: The Charitable Remainder Trust

Article originally published in January 2017 edition of Eye on Money.