Charitable Lead Trust

A charitable lead trust is very similar to a charitable remainder trust. It simply works in reverse.

A charitable remainder trust pays the grantor current income and provides a tax deduction based on the present value of the remainder interest the charity will ultimately receive.

Conversely, a charitable lead trust pays income to the charity for a period of time and then passes the property to the grantor's (givers) beneficiaries.

The grantor can receive an income tax deduction for the charitable contribution of the income that goes to the charity. However, this is a very complicated area and you must get expert tax advice before taking this deduction. The reason is that the income tax deduction is limited (depends on the type of property given away) and can only be taken in the year the property is put in the trust. Also, future income that goes to the charity, might be taxed to the grantor. However, all of this can be avoided, if the grantor elects not to take the income tax deduction and the trust is drafted correctly.

To further complicate matters, the value of the remainder interest is considered to be a gift to the beneficiary that is designated to receive it (after the charity has received its income for the specified period of time). The gift is subject to gift tax; however, a good trust attorney can possibly arrange things so as to avoid having to pay a gift tax.

Finally, since the remainder interest is considered to be given away at the time it’s placed in the trust; it obviously is not included in the grantor’s estate and thus avoids any estate tax.

The Internal Revenue Service has two publications (Pub 526 and 561) that have great free information about the tax rules for determining the value of donated property and making charitable contributions. You can find those on the IRS website at Pub 526 and Pub 561.

You can see that a Charitable Lead Trust is a pretty complicated and sophisticated estate planning tool. This is not a do-it-yourself trust project. You definitely should discuss it with a good living trust attorney.

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