What is a Charitable Lead Trust

A charitable lead trust is a type of irrevocable trust 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 expires, 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 charitable contributions, without having to manually issue monthly payments.

These forms of trusts are generally set up during the process of estate planning, or during the writing of a will, when benefactors wish to reduce the possibles burdens beneficiaries would normally incur by receiving their inheritance. These trusts, which cost around $1,000 to set up, can be prepared by any attorney familiar with estate planning.

Key Takeaways

  • A charitable lead trust signifies a type of irrevocable trust that aims to reduce a beneficiary's potential tax liability upon inheritance. 
  • These structures present beneficiaries with potential tax benefits, such an income tax deduction for charitable donations and savings on estate and gift taxes.
  • A charitable remainder trust is the polar opposite of a charitable lead trust, because instead of only making monthly payments to a charity, the trust can make a monthly payment to the beneficiary, as well.

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 monthly payments to the beneficiary, and in some instances, to the benefactor, as well. This amount must be set at a minimum of 5% and no more than 50% of the balance of the trust. 

Unlike some trusts, a beneficiary or benefactor can continue making payments into the trust as time marches on. The benefactor may be eligible to take a deduction for the establishment of the trust. It can be funded with various assets such as cash, publicly-traded securities, qualifying stocks, and real estate.

Like the charitable lead trust, the charitable remainder trust lets beneficiaries take advantage of the donations that they are making. The maximum term allowed on this type of trust is 20 years, which effectively means that after the 20-year period has ended, the trust must pay out the balance to the charitable beneficiary, which may either be a public charity or a private foundation.

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 its initial signing.

[Important: Charitable lead trusts may be structured to be “reversionary,” where remaining assets revert to the individual who created the trust, or they may be “non-reversionary,” where remaining assets funnel to a beneficiary other than the originator.]