Using a charitable lead trust in your estate planning can be a wise move. Charitable lead trusts provide a way for you to give a substantial gift to your chosen charity, benefit from certain tax advantages, and ultimately leave assets to your heirs. It is important to recognize that charitable lead trusts can be complicated estate planning tools to draft, so it is wise to obtain advice from your estate planning lawyers.
The definition of a charitable lead trust
A charitable lead trust is a special type of trust that you can choose to create either during your lifetime or upon your death. Charitable lead trusts that are created through a will upon your death are most common. This specific type of trust allows you to include trust assets, usually cash or securities, for the benefit of your selected charity. Payments are made from the trust to the charity annually for a set number of years. When that time ends, any assets that remain are then distributed to the beneficiaries you have named. Most people list their heirs as their beneficiaries.
What are the benefits of using a charitable lead trust?
One of the major benefits of using a charitable lead trust is that more than just your chosen charity can benefit from the trust assets. While that charity can rely on a steady source of income for a set period of time, there are other benefits that you also receive. Any assets that remain will be distributed to the non-charitable beneficiaries you have chosen and the transfer of those assets will not be taxed by estate taxes or gift taxes. In other words, you can have the same gift and estate tax benefits that you would have if you simply wrote a check to make a donation to your favorite charity. If you still have questions about these benefits, our estate planning lawyers can help.
Specifics on creating a charitable lead trust
When it comes to estate planning, there are some factors about a charitable lead trust that you should understand. The first is that a charitable lead trust needs to be irrevocable. That means once the trust has been created and the assets have been transferred, you no longer have control over those assets. For that reason, and that fact that most charitable lead trusts are worth a substantial amount of money, this type of trust requires a significant financial sacrifice.
As far as the time period, most charitable lead trusts are created to last 10 to 20 years. However, some people draft them to last for the lifetime of an identified person, like a spouse or child. You should let our estate planning lawyers explain your options to you, as there are some limitations on the lifetime provision.
The investment of trust assets is an important component of the trust
Charitable lead trusts are considered a type of annuity trust. That means the chosen charity will get a percentage of the assets each year. As the person creating the trust, you can determine the percentage and the charity will then be guaranteed that amount. However, the non-charitable beneficiaries are not guaranteed any specific amount. In fact, they are not guaranteed to receive anything once the term of the trust ends because the money may run out. As your estate planning lawyers can explain, proper investment is a necessity. Why? Because if the trust assets are not invested properly, then they will not provide a sufficient return and there may not be anything left for your non-charity beneficiaries.
Understanding the tax benefits of a charitable lead trust
When it comes to taxes, the IRS looks at the present value of the total charitable gift that will be earned over the life of the trust. That present value will not be subject to estate or gift taxes. In determining the present value, the IRS looks at the amount the charity will receive each year, the term of the trust and the expected return on the investment of the trust assets. In most cases, the IRS predicts the return based on the current interest rate set by the U.S. Treasury.
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