Charitable Trusts
Using a Charitable Trust in Your Estate Plan
With a charitable trust, you can create an income stream for yourself and transfer the assets of the trust to a charity at a later date, or you can set it up so that the income is paid to the charity for a specified period of time, after which the assets are transferred back to your family. In addition, transferring assets to a charitable trust removes them from your probate estate and reduces your taxable estate.
There are two main types of charitable trusts: charitable remainder trust and charitable lead trust.
The Charitable Remainder Trust
A charitable remainder trust helps you diversify appreciated assets (such as stock or real estate) into potential income-producing investments without incurring capital-gains tax.
Here's how it works. You gift appreciated assets to a charitable trust. The trustee sells those assets and reinvests the proceeds in income-oriented investments, which are then held by the trust. Capital gains within the trust are free of income tax. The trust makes annual, quarterly or monthly payments to you (and your spouse, if desired), either for life or for a specified number of years. At your death (or after the death of both you and your spouse), the principal (or "remainder") of the trust is paid to the charitable beneficiary.
In addition:
- You get a charitable income tax deduction at the time you create the trust, based on the "present value" of the future gift to charity.
- The gift to the trust reduces your taxable estate.
The Charitable Lead Trust
In some ways, a charitable lead trust is the opposite of a charitable remainder trust. With a charitable lead trust, you gift assets to a charitable trust. The trust makes annual, quarterly or monthly payments to a charity or charities of your choice, either for life or for a specified number of years. The charitable payments can be a fixed dollar amount or a specified percentage of the trust's value. At the end of the trust term, the remaining principal of the trust is distributed to your family or to a trust for the benefit of your family.
The charitable lead trust can be an effective wealth transfer strategy because the economic value of the gift may be much greater than its value for gift tax purposes. In addition, the trust can be designed so that you get a charitable income tax deduction at the time you create the trust (based on the "present value" of the income stream to the charity) or so that the charitable deduction is used by the trust itself to offset trust income. In addition, the charitable portion of the gift reduces your taxable estate.