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What Is A Charitable Lead Trust?


A charitable lead trust is a type of charitable trust that gives financial support to one or more qualified charitable organizations by distributing their assets.

Once you establish a charitable lead trust, you can’t take the assets back because it is a form of irrevocable trust. It is up to the grantor to set a fixed term for charitable donations to be given to the organization.

For anyone of high worth, charitable lead trusts can be the ideal method to structure donations to a charitable organization over time and reap the benefits. The best way to decide if it is the best type of trust for you is to consult an experienced estate planning attorney. Keep reading to learn more about how a charitable lead trust works, the benefits for you, your beneficiaries, and the charitable organizations whose cause you will help support.

How Does a Charitable Lead Trust Work?

Charitable lead trusts are often complicated and have to follow specific IRS rules. So, if you are considering establishing this or another type of charitable trust, it is crucial to consult with your estate planning attorney in Alabama.

1. Funding the Trust

When you fund the trust, depending on the type you choose, you may receive an immediate partial tax deduction determined by the terms of the trust, the projected lead payments, and the IRS interest rate that is used to calculate the assumed growth rate of trust assets.

The grantor may also contribute assets like real estate, private business, and public and private company stocks. However, additional considerations include tax treatments and whether or not they need to be sold to have enough funding to support the trust payments.

The charitable lead trust can either be funded while the individual is living or through a will and is ideal for those who are generous in nature and looking for income and gift tax solutions for planning purposes.

2. Funds are Donated to the Charitable Organization

Payments are given to one or more charitable organizations for a designated number of years, the duration of life of one or more people, or a combination of both. Charitable lead trust differs from the charitable remainder trust because it is not under the same mandatory 20-year time limit if the fixed term option is selected.

There is also no mandatory minimum or maximum payment required to the charitable organizations, only that payments be made at least annually. The income distribution is set up for a certain number of years, the duration of one or more people’s life or a condition, and will continue to make donations during this time, known as the “term of trust.”

3. Distribution of Remaining Assets Non-Charitable Beneficiaries

When the charitable lead trust term ends, the remaining assets are distributed to the non-charitable beneficiaries of the trust in such a way that it will minimize or possibly even eliminate transfer, gift, or estate taxes. 

When established as a charitable lead annuity trust, a charitable lead trust will allow the charitable organization to receive payments in a specified amount each year from the trust, usually the same amount yearly.

Suppose the trust is established as a charitable lead trust. In that case, the charitable organization will be given a specified percentage of the trust assets yearly, while the payment amount the charitable organization receives yearly may vary. Depending on which one you choose, the value of the assets that remain at the end of the trust term may be affected.

Difference Between Grantor and Non-Grantor Lead Trust

If you are considering a charitable lead trust, there are two types and factors and benefits to consider for both depending on your goals. There is the grantor lead trust or the non-grantor lead trust.

Grantor Trust

The following are the advantages and disadvantages of this type of trust:

  1. The grantor gets an immediate income tax charitable deduction.
  2. The grantor is the owner of the trust for income tax purposes.
  3. The grantor receives tax deductions that are determined by the present value of future payments that the charitable organization will receive.
  4. The grantor is taxed on the income created by the trust yearly as it is a grantor trust.
  5. By investing the grantor’s trust assets into charitable tax-exempt investments, it may reduce realized taxable income to the grantor.

Non-Grantor Trust

The following are the advantages and disadvantages of this type of trust:

  1. A significant benefit is that it reduces or eliminates estate or gift taxes to the grantor.
  2. The assets are under the ownership of the trust for federal tax purposes.
  3. The trust pays taxes on undistributed net income.
  4. The trust claims the income tax charitable deductions for its annual distributions to charitable organizations.
  5. Income tax deductions for the non-grantor’s trust annual distributions to charitable organizations can’t be claimed by the grantor.
  6. Potential gift tax costs are less if the remainder value of the trust is low.
  7. If the value of the assets of the trust appreciates significantly, it can be transferred to one or more heirs free of gift or estate tax.

Most of the benefits will go to the beneficiaries who end up inheriting the assets through this trust and will receive their inheritance with reduced gift and estate taxes and capital gains compared to receiving the assets directly from you.

Estate Planning For The Future You Can Trust

Brackin Law Firm is here to help you whether you are a high-wealth or high-earning individual with more complex estate planning needs or an individual or family with a single home. We will provide estate planning and trust solutions to protect your family’s needs and legacy.

Baldwin County families have trusted us for over 35 years and look forward to helping you prepare your estate planning needs. Contact us today for a consultation!

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