Hyden, Miron & Foster, PLLC Law Blog

Sunday, April 17, 2022

What is a Charitable Lead Trust?

Are you passionate about a particular cause? Is charitable giving a priority for you? If so, there are a number of estate planning tools that will allow you to prioritize charitable giving as well as allowing you to reap a number of other benefits, such as reduced tax liability and ease of asset transfer to your loved ones. One such mechanism is a charitable lead trust.

What is a Charitable Lead Trust?

A charitable lead trust is a specific kind of irrevocable trust. The trust itself can either be funded during the lifetime of the trust creator, the “trustor,” or by will. In its design, a charitable trust provides support to a charitable organization for a set period of time. Once this time period has lapsed and upon a time designated in the governing trust document, the remaining assets in the trust pass to the named trust beneficiaries.

If you have ever heard of a charitable remainder trust, you may have gotten it confused with a charitable lead trust. The two are, after all, trust types that provide for the giving to charitable causes when established as part of an estate plan. They are, however, notably different. In fact, a charitable lead trust is, essentially, the inverse of a charitable remainder trust. A charitable lead trust provides financial support to a charity over a set period of time and, eventually, the remainder of the trust will pass to the named trust beneficiaries. Conversely, in a charitable remainder trust, a stream of income goes to the certain named parties, such as family members and other loved ones, for a set term. Upon the end of that term, the remaining trust assets are transferred to the charitable organization beneficiary named in the trust document.

There are a number of ways that a charitable lead trust can be structured. There are a few options for how payments are made from the trust to the selected charity (or charities). For instance, the named charity may receive a fixed annuity payment. Alternatively, the charity may receive a percentage of the trust. Regardless of how the payments are made and calculated, upon expiration of the time period set forth in the trust documents, the balance of the trust is paid out to the named beneficiaries upon its expiration. One of the benefits of a charitable lead trust is that it allows a person who wishes to make charitable contributions to do so in a continuous way without the need to manually issue monthly payments. Instead, the donation is automatically taken from the trust and transferred to the charity of the trustor’s choice.

Another prominent benefit to a charitable lead trust is a reduction in tax liability for the trust beneficiaries. Once the beneficiaries inherit the balance of the trust, they may be able to take advantage of income tax deductions for charitable donations as well as reduction in estate and gift tax liability. There are, however, complicated and specific IRS rules relating to charitable trusts. To properly establish a charitable lead trust and to be sure you are property and completely reaping the tax advantages it has to offer, consider consulting a trusted legal or tax professional.

Arkansas Estate Planning Attorneys

The trusted estate planning and tax attorneys at Hyden, Miron & Foster can help you create an estate plan that honors your desire for charitable giving while maximizing other benefits such as tax advantages. Contact us today.

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