Charitable Lead Trust and Its Advantages – PillarWM
Are you a high net worth or an ultra-high net worth investor who would like to benefit a charity sooner rather than later? If yes, you should consider a charitable lead trust. Having a charitable lead trust allows you to make an immediate impact with your gift and enjoy several other advantages too. For instance, such trusts allow you to take advantage of tax benefits and still make a significant gift. Moreover, a charitable lead trust can even help to mitigate family quarrels over inheritance issues. By spreading your wealth to charities during your lifetime and having the remaining assets paid to your heirs upon your demise, you may prevent much of these possible squabbles. If you have $5+ million worth of liquid assets, you should request a free copy of our book,7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning to learn more about estate and tax planning strategies.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
At Pillar Wealth Management, while we are not attorneys, we thought this article might be helpful since our wealth managers specialize in offering wealth transfer and estate planning help to individuals and families who have $5 million to $500 million worth of liquid investable assets. We are well-versed in the techniques in which estate taxes impact affluent individuals and will evaluate if a charitable lead trust is an appropriate tool for your unique financial situation. If you wish to get started with estate planning, feel free to schedule a meeting on our website today!
Having said all this we definitely recommend you consult an attorney before moving forward with a charitable lead trust.
What Is A Charitable Lead Trust?
A charitable lead trust is a gift of cash or other assets to an irrevocable trust with the key objective of reducing a beneficiary’s possible tax liability upon inheritance.
Also known as a “charitable income trust,” the term “charitable lead trust” is more frequently used since the payment of the income interest to a charitable organization comes before or leads the payment of the remaining income interest.
How Does A Charitable Lead Trust Work?
Now that you have a basic idea of what a charitable lead trust is let’s get into the details of how it works.
At the most fundamental level, a charitable lead trust operatesas follows – the person setting up the charitable lead trust contributes to the fund the trust for a time period measured by a set term of years, the lifetime of an individual, or a combination of both. Depending on the structure of the trust, payments from it are made to the chosen charity as either a percentage of the trust or a fixed annuity. Once the income stream period ends, the trust assets are paid to either the grantor or to other non-charitable grantees, usually family members, named in the trust instruments.
Charitable lead trusts are generally quite tricky and subject to particular IRS rules. If you are thinking of establishing a charitable lead trust, you should first consult with your financial advisor. At Pillar Wealth Management, our team has worked on estate plans for several affluent individuals, and we now numerous experts in this field and often coordinate with them when needed. If you need to discuss estate planning options, including charitable lead trusts, with us, click here to sign up for a free meeting with us.
Here is an in-depth explanation of how a charitable lead trust works.
1. Making Contributions to Fund the Trust
Based on the kind of charitable lead trust you choose, you might be entitled to take an instant partial deduction in tax through cash contributions. The precise deduction in income tax will be calculated to take into account the estimated lead payments, the term of the trust, and interest rate of the IRS that’s used to assume a specific growth rate of trust assets.
Specific assets, including real estate, publicly traded stocks, private company stock, and private business interests, can also be granted. However, they come with further considerations regarding tax treatment and might have to be sold to ensure sufficient income to fund the payments made to the trust.
2. Sending Payments to the Charity
The charitable lead trust sends payments on a yearly basis to a minimum of one charity for a set number of years, the lifetime of one or more persons, or a blend of both. Charitable lead trusts differ from charitable remainder trusts because they aren’t held to the compulsory time period of 20 years if you choose the option of a fixed term. Moreover, there is no necessary maximum or minimum payment requirement to the charitable beneficiaries, as long as the payments are sent on a yearly basis.
3. Distributing Remaining Assets to the Selected Non-Charitable Recipient
After the term of the charitable lead trust comes to an end, the remaining assets are dispersed to you or other chosen beneficiaries in a way that reduces or completely eliminates transfer taxes.
The term “lead” in a charitable lead trust indicates a “lead interest” in the trust, which is the charity’s right to get payments from the trust for the established term. If you have established the trust as a charitable lead annuity trust, the charity will get a certain amount of income from the trust every year. Generally, this amount stays the same each year.
On the other hand, if you establish the trust as a charitable lead unitrust, the charity will be entitled to receive a specific percentage of assets from the trust every year. The exact amount of payment to the charity might differ each year.
The decision of annuity or unitrust payments can have consequences for the value of the remaining assets when the term of the trust comes to an end.
Can A Donor Advised Fund Be the Beneficiary of a Charitable Lead Trust?
When establishing a charitable lead trust, a common concern that people have is that can a donor-advised fund be the beneficiary of a charitable lead trust?
The answer to this question is that a charitable lead trust can work in conjunction with a donor-advised fund. Based on the kind of charitable lead trust you establish, modifying charitable beneficiaries might be impermissible or extremely difficult.
Several donors choose to retain a higher degree of freedom without having to change the trust in case of a desired amendment in charities. Hence, they can name the donor-advised fund, which is a dedicated account for the singular objective of sponsoringcharities, as the income beneficiary of the charitable lead trust. The donor’s financial advisor can continue to handle the investment management of the remaining assets.
Suppose you name a charity supporting a donor-advised fund as the primary grantee of a charitable lead trust. In that case, you can enjoy more freedom regarding which charity or charities eventually benefits.
How Does it Work?
The donor-advised fund will get payments from the charitable lead trust. After that, you can suggest payments from the balance of the donor-advised fund to sponsor the charities you like.
Simultaneously, you preserve the advantages of the charitable lead trust in handing over assets to your family members and other non-charitable beneficiaries.
In a nutshell, the donor-advised fund enhances the charitable lead trust and offers significant freedom to you to engage in planned giving during your life as well as create a nest egg for your heirs when the term of the charitable lead trust comes to an end.
What Are the Advantages of a Charitable Trust?
Charitable lead trusts are one of the key tools used in estate planning. If you want to learn more about the other tools involved in estate planning, you can order a free copy of our hardcover book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies For Families Worth $25 Million To $500 Million.
Given the unique versatility and structure of charitable lead trusts, there are plenty of advantages that come from establishing and using them. These benefits include:
1. Tax Deductions
Income tax advantages associated with charitable lead trusts are dependent on the kind of trust you set up along with the relevant tax codes – which have recently changed significantly. In most situations, you can either get a partial income tax deduction depending on the combined value of the assets you wish to invest. On the other hand, you can receive a complete charitable deduction in income tax the year in which the funds are distributed.
Note that charitable lead trusts aren’t exempted from taxes. Still, they do give you the chance to retain highly appreciated assets, lower estate taxes, and become eligible for deductions in income tax. If you are an individual with $5 million to $500 million worth of liquid assets and want to learn more about tax-saving strategies, you should request a free copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
Keep in mind that all tax reduction strategies, including charitable lead trusts, require professional guidance to ensure that they are rightly executed and are effective. Wealth managers are adept in tax management and tax deduction strategies for high net worth individuals. Additionally, they can even help you build your wealth by optimizing your portfolio for the highest growth. Want to learn more about this? Read our detailed guide, Improving Portfolio Performance!
2. Grow Your Donations
When you are choosing which charitable organizations to support, you can possibly grow your donations. Many sponsoring organizations have numerous investment options from which you can suggest an investment plan for your charitable funds. This way, you can make more money available for charitable organizations you care about.
However, when making any sort of investment, you need to make certain paradigm shifts. Read more on this in our guide, 5 Critical Shifts for Maximizing Portfolio Growth Strategies.
3. Lower Estate Taxes
Donor assets used to fund charitable lead trusts generally come from an investor’s estate. Donors can lower the amount of tax levied on their estate at the time of their demise by reassigning the funds to the trust. This helps in retaining the wealth and assets for other non-charitable beneficiaries. Funds in charitable lead trusts may also be eligible for a deduction in gift tax.
4. Support the Charities of Your Choice
You can support nearly any IRS-qualified public charitable organization with grant recommendations from the donor-advised fund. This can be a religious institute or your alma mater, or even your local homeless shelter. The public charitable organization sponsoring your account will perform due diligence to make sure the funds granted are sent to an IRS-qualified public charitable organization and will be used for charitable reasons.
5. Create an Income Stream from Physical Assets
If you have a property that doesn’t create an income, but you want it to generate an income, you can sell the property and put the remainder into the trust. Consequently, this generates an income stream that directly benefits you. This is another unique feature of charitable lead trusts.
Charitable lead trusts mandate comprehensive planning along with an initial setup. However, after this stage, these trusts are quite easy to support and maintain with time.
Last Few Words
Like always, if you wish to incorporate charitable donations in your estate plan, you should discuss with your financial advisor and estate planning attorney to find out how you should structure them to best fulfill your needs and requirements, now and in the future.
At Pillar Wealth Management, we have been assisting high net worth clients like you with comprehensive estate and tax planning. We will use our vast experience to devise the best strategy for your unique financial circumstances. You can give us a call to book your introductory meeting.
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