Estate planning typically entails the integration of numerous goals into one comprehensive plan. For example, providing for loved ones and gifting to charity can be accomplished in one trust by creating a charitable lead or charitable remainder trust. Charitable lead and remainder trusts are estate-planning tools that have similar effects while using procedures that are nearly opposite. One creates a trust that provides a charitable beneficiary with income for a specific time period, with the remainder being gifted to a non-charitable beneficiary after the initial time period is over. The other provides income for a non-charitable beneficiary first with the remainder going to a charity.
Charitable lead trusts have the added benefit of reducing the taxable assets of the donor. Assets are placed in the trust and a charitable beneficiary (or several) named. Disbursements are periodically made to one or more charities. This continues for a set amount of time. After the time is up, the leftover money goes to the non-charitable beneficiaries who will pay little or no inheritance tax. Generally, there is no gift tax paid by the non-charitable beneficiaries. For example, a lead trust is set up naming a charity as the beneficiary, which receives money from the trust for 20 years. After 20 years, the remaining assets in the trust go to the donor’s granddaughter.
The donor setting up the lead trust, however, will likely have to pay gift taxes on the assets at first. The trade-off for the donor is in the form of a federal tax deduction of the amount donated to the charities each year.
Charitable remainder trusts reverse the beneficiaries, with the remainder of the trust being sent to a charity. The trust provides money to a beneficiary for a specific period of time, or for the life of the beneficiary. Once that period is over, or when the beneficiary dies, the remainder of the trust is released to a charity. So, for example, a donor designates his son as the beneficiary. The son receives a certain amount of money each year until he dies. Then, the rest of the assets in the trust go to another charity named by the donor.
Both charitable lead and charitable remainder trusts are common additions to a comprehensive estate plan when both charitable and non-charitable gifting are goals of the plan. If you believe that a charitable lead or charitable remainder trust would make a good addition to your estate plan consult with your estate planning attorney about the specifics of setting up one of these trusts.