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How Does a Charitable Lead Trust Work?

Planning

Charitable gifts are commonly used in estate planning to help reduce the size of a person’s taxable estate while still providing for their families.

For example, many Florida residents create charitable remainder trusts. This is a special type of irrevocable trust where the person making the trust–known as the grantor–transfers assets to a trustee. The trustee then makes annual distributions from the trust to a beneficiary, usually the grantor or a member of their family, for a set period. Once that period expires, the remainder of the trust assets are distributed to one or more charitable beneficiaries–hence the name, “charitable remainder trust.”

Paying the Charity First, Family Members Later

But there is another type of charitable trust known as a charitable lead trust. This is basically the reverse of a charitable remainder trust. In a charitable lead trust, the grantor still makes an irrevocable gift of certain assets to a trustee. But the trustee then makes annual distributions to the charities, rather than the grantor or their family, for a set period of time. And when that time is over, the remainder of the trust is distributed to the grantor’s designated family members or other non-charitable beneficiaries.

Charitable lead trusts are complex estate planning documents. Unlike the more common revocable trusts used in estate planning, there are a number of IRS rules that charitable trusts need to follow. This is why it is important to work with an experienced Florida estate planning attorney before attempting to execute such a trust.

With that in mind, here is a very simple overview of how charitable lead trusts work:

  • The grantor funds the trust with cash or other assets. As noted above, charitable lead trusts are irrevocable, so the grantor cannot simply take back the gift later. Certain types of assets may also raise specific tax issues that will need to be addressed before the gift is completed.
  • The trustee makes payments from the trust to the named charitable beneficiaries. Such payments must be made at least once per year, although they can be made more frequently. The trust will specify the term, i.e., how many years the charities will continue to receive distributions from the trust.
  • The trust must also name the remainder beneficiaries, i.e., the people who will receive the balance of the trust assets once the specified term is completed. By transferring assets this way, as opposed to making a direct gift to the non-charitable beneficiaries, the grantor can realize significant tax savings.

It should be noted that charitable lead trusts may either be an “annuity trust” or “unitrust.” This basically refers to how the trustee will determine the amount of the charitable beneficiaries’ annual payment. With an annuity trust, the beneficiaries usually receive a specific amount each year regardless of trust performance. In contrast, with a unitrust the distribution is based on a specified percentage of the trust assets, meaning the exact amount may fluctuate from year-to-year.

Speak with a Lee County, Florida, Trust Lawyer Today

Once again, if you are thinking about creating any type of charitable trust, you need to speak with a qualified Fort Myers estate and probate administration attorney first. Contact the Kuhn Law Firm, P.A., at 239-333-4529 to schedule a free consultation with a member of our estate planning team today.

https://www.kuhnlegal.com/what-is-a-stepped-up-basis-and-how-does-it-affect-my-estate-planning/

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