Charitable Lead Trust

Everyone involved benefits with a charitable lead trust, except perhaps Uncle Sam. A charity gets a large donation, your heirs get an inheritance with the amount of taxable income reduced, and the grantor (person setting up the trust) saves on taxes, while feeling good about donating to a charity.

The way it works is that you set up a trust with a portion of the funds designated for a charity of your choice. Since the charity is paid first from the trust, they are the “lead.” The funds could be in the form of cash, stock, or other assets. After a specified period of time, the remainder of the trust is transferred to your beneficiaries. You can set it up as an annuity trust where a fixed amount is paid out each year, or a unitrust where the amount of the payment depends on the value of the assets in the trust, i.e., how much interest was made or how much the stock appreciated. The person setting up the trust gets to decide when the trust term ends.

The tax benefits run such that any interest earned or stock price appreciation will not be subject to estate or gift taxes when these assets are given to the beneficiaries after the charity has been given their share. And, of course, the grantor can get a tax deduction for the amount the charity receives. So if you have assets that are generating a lot of income, a charitable lead trust might be the perfect solution as a tax shelter.

The main drawback to a charitable lead trust, or any irrevocable trust, for that matter, is that you can’t change your mind once you set up the trust with an ending date. The assets will have to stay there until that date. Also, when the assets are transferred to the beneficiaries, the original amount will be taxable as gifts.

Any large charity would be only too happy to work with you to help set up a charitable lead trust, along with an estate planning attorney.