Typically, charitable lead trusts and charitable remainder trusts are implemented when your estate exceeds the federal estate tax exemption. This qualifies both charitable trusts as “advanced” estate planning tools.
Besides lessening or totally avoiding the federal estate tax, there are income tax, capital gains tax, and charitable intent benefits as well.
Simply put, the charitable lead trust provides an income stream to your favorite public charity for a period of years (up to 20) or until the occurrence of a specific event such as your death or the death of the last of you and your spouse to die.
Then, the remaining assets return to your beneficiaries.
The charitable lead trust can be used alone or in conjunction with charitable remainder trusts.
For all intents and purposes, the charitable remainder trust is the opposite of the lead trust.
You receive an income stream for a period of years (up to 20) or until the occurrence of a specific event such as your death or the death of the last of you and your spouse to die.
Then, the remaining assets go to your named charity.
The charitable remainder trust is often used to provide an income stream to pay for life insurance owned by an irrevocable life insurance trust.
There are significant capital gains benefits if highly appreciated assets are used to fund these charitable trusts. Charities don’t pay income tax so when assets are converted into income producing assets, there is no taxable event.
And, even when you receive your income stream from a charitable remainder trust, it is a 4 tiered interest. This means that it is not taxed as straight income tax or, even, capital gains tax.
The use of charitable remainder trusts and charitable lead trusts are truly a win – win for everyone.