Charitable lead trusts are designed for people who would like to benefit a charity now rather than later. You may have heard about some charitable trust strategies before but decided against them because you wanted to make an immediate gift to charity.
With a charitable lead trust, your gift can have an immediate impact, and you’ll be entitled to other benefits as well. These trusts enable you to take advantage of tax benefits and still make a significant gift.
If you are accustomed to making outright contributions to your favorite charity, or if you typically sell an investment and give all or a portion of the money to charity, you may be attracted to the special advantages of using a charitable trust.
Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for charitable organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.
If you structure the trust as a grantor charitable lead trust, you will be taxed as the owner for federal income tax purposes even though you don’t receive the income yourself. You will receive an immediate charitable income tax deduction based on the present value of your gift. Basically, the trust is giving payments to the charity for the duration of the trust but you don’t relinquish ownership of the assets. Your income tax deduction will be based on the payments to charity, the duration of the trust, and the IRS interest rate and tables used in the calculation. Your write-off may be limited to a portion of adjusted gross income but can be carried forward to future years.
With a charitable lead trust, the income from the reinvested assets will then go to the charity. The charity will receive distributions for the duration of the trust. You may specify that the trust last for a set number of years or the life of you or someone else. At the end of this period, the remaining assets are paid to you or your beneficiaries, for example.
A charitable lead trust may also help reduce family squabbles over an inheritance. If you were to actually gift the asset to the charity upon your death, your heirs may feel somewhat cheated. By giving income to the charity during your lifetime and having the remaining assets paid to your beneficiaries upon your death, you may avoid much of this potential controversy.
If you are interested in increasing your gift to a charity and your tax benefits during your lifetime, a charitable lead trust may enable you to accomplish your goals.
By taking the time to plan your charitable gifts, you may be able to take advantage of some special tax benefits and make charitable giving a real win-win situation.
While trusts offer numerous advantages, they incur up-front costs and ongoing administrative fees.The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Gerald R. Dewes does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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