A charitable lead trust is usually implemented after other estate planning basics are done, such as your will, revocable trust, powers of attorney and health care directive, says Tri City Business News’ recent article entitled “Charitable lead trusts do good while reducing estate taxes.”
A charitable lead trust is an irrevocable trust that provides financial support to one or more charities for a period of time, with the remaining assets eventually going to family members or other beneficiaries. This type of trust is often used in high-net-worth estate planning. A Massachusetts estate planning attorney can help you set one up to meet your goals.
Let’s say there’s a married couple with some extra money they want a charity to benefit from. The couple has an attorney draft a charitable lead trust (CLT). The terms of the trust say that, for the lifetime of the couple (or the surviving spouse), the CLT will annually pay 5% of the trust to a qualified charity. At the death of the surviving spouse, the money left in the trust will go to the couple’s children. This is called a “split-interest” gift, where a portion of the gift of the trust goes to charity and a portion will ultimately go to the children.
The current interest rate is used to actuarially (a statistical calculation based on certain assumptions like life expectancy) set the amount of the gift going to the children, which the parents will use to file a gift tax return.
With a few exceptions, there’s no tax assessed on a gift like that. It’s just required by law to report gifts that size to the IRS. However, trust income is taxed like the income of any other complex or grantor trust.
In a low interest rate environment, the calculated amount (the actuarially determined) going to the children will appear to be lower. However, the actual amount could be much higher, based on the performance of the assets in the trust. For the calculation, because the amount going to the children appears lower, the calculated amount going to the charity must be higher.
Neither the parents nor the children get anything from the trust during the parents’ lifetime. In that way, it’s like a will where nothing goes to the children until the deaths of the parents. What makes a charitable lead trust attractive is the added ability to give to charity and try to reduce potential wealth transfer tax.
In addition, a charitable lead trust has another benefit: it potentially provides a consistent and reliable stream of income to your favorite charity for years to come. As such, in addition to acting as a legally sanctioned wealth transfer technique, it provides a wonderful benefit to worthy organizations.
If you’re looking a Massachusetts attorney to help you with your high-net-worth estate planning, I’ll work with you to create the best plan for your situation, including a charitable lead trust, if that’s your choice. Contact us today to schedule a free, no-obligation consultation.