There are two main types of charitable trusts, and they differ primarily in how the trust’s income is allocated:

  • A charitable lead trust is a good giving strategy for those who don’t need a set amount of additional income and whose primary goal is to donate money to a charity.
  • A charitable remainder trust makes payments in the opposite way: A set amount of income from the trust goes to one or more beneficiaries first, and the remaining income goes to the charitable organization.

Charitable lead trust

A charitable lead trust can be an excellent estate planning vehicle if you expect your assets to substantially appreciate in value. You can keep the assets in the family and still enjoy some tax benefits

The charitable lead trust pays income to a charity for a certain number of years, and then the trust principal passes back to you, your family or other heirs. It’s called a charitable lead trust because the charity gets the first, or lead, interest. The trust must adhere to the charities decided on at its initial signing.

A charitable lead trust is designed to reduce a beneficiary’s potential tax liability. Once the beneficiary inherits the remaining balance, there are other potential tax benefits, including an income tax deduction for charitable donations and savings on estate and gift taxes.

Charitable remainder trust

A charitable remainder trust is the mirror image of the lead trust: Trust income is payable to you, your family or other heirs for a number of years. Then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income, which is a desirable feature if you won’t have enough income from other sources.

Charitable remainder trusts are designed to reduce your taxable income by dispersing income to beneficiaries for a specified time and then donating the remainder to the designated charity, which may be either a public charity or a private foundation. It’s considered a split-interest giving vehicle, meaning that it allows you to make contributions, be eligible for a partial tax deduction and donate remaining assets. The charitable remainder trust lets trustees later change the charities designated as beneficiaries.

Charitable trusts are irrevocable and cannot be modified or terminated without the beneficiary’s permission. Once you transfer assets to the trust, you’ve effectively removed your rights of ownership of the assets. Charitable trusts let you pursue your philanthropic goals while still generating income.

You create charitable trusts for their tax advantages, too. These trusts can limit your income taxes, capital gains taxes and estate taxes. You can make an income tax deduction for the value of your trust assets. You may either take the entire deduction in the year you execute the trust, or you could spread it over five years. In calculating the amount of your deduction, your accountant will factor in such details as life expectancy, the number of your heirs and inflation.

Of course, this is just an introduction to a complex topic. If you think a charitable trust is right for you, discuss it with legal and financial professionals.

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