What is a Charitable Lead Trust

A charitable lead trust is a type of irrevocable trust that is designed to reduce a beneficiary's potential tax liability upon inheritance.  

BREAKING DOWN Charitable Lead Trust

A charitable lead trust works by donating payments out of the trust to charity for a set amount of time. After that period has expired, the balance of the trust is then paid out to the beneficiary. While this reduces the taxes owed by the beneficiary once they inherit the remaining balance, it also presents them with other potential tax benefits such an income tax deduction for charitable donations and savings on estate and gift taxes. Additionally, it sets up a continuous way for the beneficiary and benefactor to make a charitable contribution without having to manually issue a monthly payment.

These forms of trusts are generally set up during the process of estate planning or during the writing of a will, when the benefactor wishes to reduce any possible burden that the beneficiary would incur by receiving their inheritance. These trusts can be set up by any attorney who is familiar with estate planning, and on average the cost to prepare a trust begins around $1,000.

What is a Charitable Remainder Trust

A charitable remainder trust is thought to be the opposite of a charitable lead trust. Instead of only making monthly payments to a charity, the trust can make a monthly payment to the beneficiary, and in some instances the benefactor, as well. This amount must be set at a minimum of five percent and no more than 50 percent of the balance of the trust.  

Unlike some trusts, a beneficiary or benefactor can continue making payments into the trust as the time goes on.

The benefactor may be eligible to take a deduction for the establishment of the trust. I can be funded with various assets such as cash, publicly traded securities, qualifying stocks, real estate and more.

Like the charitable lead trust, the charitable remainder trust allows beneficiaries to take advantage of the donations that they are making. The maximum term allowed on this type of trust is 20 years, meaning that after the 20-year period has ended the trust must pay out the balance to the charitable beneficiary. These are either public charities or private foundations. With a charitable remainder trust, these charities and foundations can be changed over time, unlike a charitable lead trust which must adhere to the groups that were originally written into the language of the trust at the initial signing.