Donors gain an immediate tax deduction, reduce their estate tax liability, and increase the wealth passed on to heirs. A charitable trust is an asset placed in trust that each year pays a specific sum of money or a fixed percentage of the trust to one or more beneficiaries.
There are two main types of charitable trusts: a charitable remainder trust and a charitable lead trust.
Charitable Remainder Trust
A charitable Remainder Trust offers three primary benefits:
Mrs. Brown, who is 65, owns a piece of property that she bought for $25,000 and that has since appreciated to $150,000. If Mrs. Brown sold the property, she would incur costs of approximately $34,500, taking into account selling costs, commissions, and capital gains tax. However, if Mrs. Brown transfers the property to a charitable remainder trust that will pay her 7 percent per year (percents vary based on current interest rates), she will receive an income stream of $10,000 annually and also gain a substantial income tax deduction for her charitable gift.
Assuming that Mrs. Brown's charitable deduction results in a federal income tax savings of $20,000 and that she invests this savings at 5 percent, her total annual income will be $11,500 ($10,500 + $1,000) - nearly $5,725 more each year than if she sold the property and invested the after-tax proceeds. What's more, if TPOWI were the beneficiary of the charitable remainder of her trust, T.P.O.W.I. would receive the principal of the trust
upon Mrs. Brown's death.
Charitable Lead Trust
A Charitable Lead Trust is the inverse of a charitable remainder trust, in that it leads with a payment stream to charity and, at the end of the trust's term, confers the remainder of the trust on a non-charitable beneficiary, such as the grantor. Charitable lead trusts are typically created when interest rates are low, increasing the present value of the charitable donation, while decreasing the taxable value of the remainder that goes to heirs. Donors gain an immediate tax deduction, reduce their estate tax liability, and increase the wealth passed on to heirs. Plus, TPOWI, as your charitable beneficiary, benefits immediately.