Which Trust is Best for Leaving a Portion of Your Estate to a Charity?

When planning your estate, you may want to leave some money to a charity you support. If you are charitably inclined, there are two types of trusts you should consider utilizing to protect yourself from excessive taxation and maintaining the value of your future charitable donation. The two trust options include (i) the charitable lead trust and (ii) the charitable remainder trust.

What is a Charitable Lead Trust?

Compared to a charitable remainder trust, the roles are basically reversed when you set up a charitable lead trust. The charitable beneficiary will receive annual payments from the trust at the beginning of the term. At the end of the trust term, the assets remaining in the trust would be paid to your non-charitable beneficiaries (e.g., your children or other loved ones).  You will receive a front loaded income tax deduction for the scheduled payments to the charity. These types of trust are favored in a low interest rate environment as set forth below.

When you have assets in a charitable lead trust, as long as the interest rate set forth Section 7520, the lower valuation of the remainder interest will help reduce the taxable portion of your gift to your non-charitable beneficiaries. Furthermore, if the assets held in the charitable lead trust appreciate during the trust term at a rate above the Section 7520 rate that was in effect at the time the trust was established, the difference between the two measures would basically translate into a tax-free gift to your beneficiaries.

As a result, a significant portion of your total gift to your beneficiaries would be passed on without having to pay a significant amount in transfer taxes, while also providing a valuable interim benefit to your charity.

Example of How a Charitable Lead Annuity Trust Works

Let’s say, for example, Person X decides to contribute $1 million to a charitable lead annuity trust that will make annual payments to a designated charity for a 5-year term. They will receive approximately a $250,000 income tax deduction in year 1 given the current 7520 rates. Once the term expires, the trust will be distributed to a trust for the benefit of Person X’s children.

What is a Charitable Remainder Trust?

A charitable remainder trust can be set up where you transfer assets into a trust and schedule annual payments that will be made either to you or a designated non-charitable beneficiary.  It is also possible to structure this payment as a fixed annuity.  There is no capital gains on the stock that is sold to fund the trust so low basis stock are good candidates to use for this technique.  At the end of the trust’s term, which can be either a specific number of years or the life of the non-charitable beneficiary, the assets held in the trust will be passed to your designated charity.

There are numerous benefits to utilizing a charitable remainder trust. However, the current low interest environment has limited the tax benefits associated with a charitable remainder trust.  As a result, you may want to consider the  charitable lead trust.

Have Questions about Setting Up a Trust for Your Estate? Contact InSight Law

As with most trust arrangements, charitable remainder trusts and charitable lead trusts are highly technical, which is why it makes sense to retain the services of a skilled and experienced trust attorney with InSight Law. Our law firm takes a unique approach to estate planning by offering clients a wide variety of ongoing resources and tools to make their estate plans complete and detailed. Schedule an online meeting today by contacting our office at 703-654-6019.