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September 05, 2013

What is a Charitable Lead Trust?

Definition

A charitable lead trust is a trust with both charitable and noncharitable beneficiaries. It is called a lead trust because it is the charity that is entitled to the lead interest in the trust property. After a specified term, the remaining trust property passes to you or another noncharitable beneficiary you designate.

Prerequisites

  • A desire to donate to charity
  • A substantial asset to donate to charity

Key strengths

  • Provides a gift and estate tax haven for assets expected to appreciate in value
  • Allows you to donate to charity and keep trust assets within the family
  • Allows you to postpone the noncharitable beneficiary's receipt of the trust assets
  • Allows you to choose the payment method to charity
  • Does not require any minimum percentage payout to charity
  • Reduces potential federal estate tax liability

Key tradeoffs

  • No income tax deduction unless you are also the "owner" of the charitable lead trust
  • Requires an irrevocable commitment
  • Requires the charitable payment to be made each year, regardless of whether there is sufficient trust income available

Variations from state to state

  • Community property states may affect any gift tax due
  • In certain instances (when the trust document is silent), state law may determine the source of payments made from the trust to charity and the order they are to be used

How is it implemented?

  • Consult a legal professional to draft the charitable lead trust document
  • Select a noncharitable beneficiary, a charitable beneficiary, and a trustee
  • Select the assets you want to use to fund the charitable lead trust
  • Select an appraiser or other professional to value unmarketable assets
  • Select the term of the trust and the payment method (annuity or unitrust)

IMPORTANT DISCLOSURES This information has been prepared by Broadridge Investor Communication Solutions, Inc. Minis & Company does not endorse the content provided, it is to be viewed for informational purposes only. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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