A charitable lead trust can be used to transfer assets to children or others at a significantly reduced tax liability. Creating a charitable lead trust involves four parties:
- A settler or grantor: the person setting up the trust
- A trustee: the person managing the trust
- Two beneficiaries: one a qualified charity or tax-exempt organization, the other a ‘regular’ beneficiary, often the grantor’s children.
Charitable lead trusts are designed to pay an income stream to a charity for a term defined in the trust documents, with the remainder of the interest passing to the non-charitable beneficiaries, upon termination of the trust. It is not used as widely as a charitable remainder trust, which benefits the non-charity beneficiary, while the grantor is living, then the charity after they pass. But in certain situations, a charitable lead trust can be a powerful estate planning tool, avoiding capital gains and estate taxes.
It sounds a little confusing, so here is an example of how a charitable lead trust may work:
Mrs. Tyler has a stock portfolio valued at $2,000,000, which she would like to convey to her children. She also is exploring ways to honor her late parents by funding a local cancer-survivor charitable organization. Transferring the stock to her children now, or through her estate, will result in significant gift or estate taxes.
Mrs. Tyler decides to transfer the stock to a charitable lead trust that will pay 8%, or $160,000, annually to the charity for 10 years. At the end of the 10 year term, the principal will be distributed to her children.
By establishing this trust Mrs. Tyler will qualify for a charitable gift tax deduction of $1,230,000. She will report a taxable gift of $770,000, which falls within her current $1,000,000 tax exemption, so there will be no tax due. If the value of the trust grows over the 10 years, any amount in excess of $2,000,000 will pass to her children tax free.
Charitable Lead Trusts are not for everyone, but they can be an excellent estate planning tool that can result in significant tax savings, while providing benefits to a favorite charity or non-profit group. An estate planning attorney with expertise in wills and trusts can help you determine the best estate plan to fulfill your individual and family goals.
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