Charitable Remainder Trust.
If donors place highly appreciated securities in the trust, the trustee can sell them without having to pay the capital gains tax realized on the profits of the sale. Low-yielding stocks can be sold and the proceeds reinvested to produce higher income for the income beneficiary. By creating a charitable remainder trust, one can enjoy a number of benefits, including professional management of the assets in the trust and a degree of financial protection. Additionally, one may receive a charitable income tax deduction depending on his/her age, or the length of the trust term, payout rate, frequency of payments, and applicable federal discount rate. Creating one of these trusts frequently enables donors to realize greater disposable income.
SUMMARY FOR CHARITABLE REMAINDER TRUST:
Document that creates: Trust
Revocable? No, but may change charitable beneficiary
Ultimate beneficiary? To benefit charities of choice Lifetime beneficiary?
Donor or others Annual benefit: Variable
Charitable Lead Trusts.
A charitable lead trust is the reverse of a charitable remainder trust. Under a charitable lead trust, which can be created by a trust or will, donors can provide that an annuity or unitrust payment be made to a fund at the charity for a term of years, after which the principal is paid to the donors or to any other non-charitable beneficiary.
Donors do not receive a charitable deduction for federal income tax purposes on the creation of a lead trust unless they choose to be taxed on the trust income (i.e., the income that will be paid to the charity). Some people may find that the chance to take a federal income tax deduction in the initial year outweighs the disadvantage of paying taxes on the trust's income in later years. Donors can negate the tax impact by funding the lead trust with tax-exempt securities.
A charitable lead trust allows the ultimate transfer of the property to be made at a lower transfer tax cost. This mechanism is especially useful for property with the capacity for appreciation. Charitable lead trusts are most sensible for a donor whose family can afford to relinquish the income from the gifted property during the term of the lead trust.
It is possible to establish a lead trust either during one's lifetime or in a will. A charitable lead trust can substantially reduce the estate taxes payable at the time of death because of the charitable deduction for the charity's charitable interest in the annuity or unitrust payment. The value of the charitable interest depends on the length of the trust and the amount to be paid out each year. The saving in estate taxes may mean that family members receive substantially more than if the property were left to them.
SUMMARY OF CHARITABLE LEAD TRUSTS:
Document that creates: Trust or will
Ultimate beneficiary? Individuals selected by donor
Lifetime beneficiary? To benefit charities of choice
Annual benefit: Fixed or variable
A charitable remainder trust pays the donor (and/or another beneficiary) either a fixed or variable income for the beneficiary's life or for a fixed term not exceeding 20 years, or a combination of the two. When the trust term expires, the remainder is then distributed to a charitable beneficiary. Charitable remainder trusts offer a great deal of flexibility. Payments may be made to the donor for life and then may be directed to a spouse or another beneficiary after death. A charitable remainder trust may be set up during one's lifetime or may be established by a will. The eventual distribution to the charity will take effect only at the death of the trust's income beneficiaries.