Charitable trusts are a popular estate planning tool because they offer the ability to accomplish numerous goals at the same time. Within the charitable trust category, there are a variety of options, but two basic types are popular because they combine charitable and non-charitable giving. Both a charitable lead and a charitable remainder trust allow you to create a trust that provides for both a cause that is important to you and people who are important to you. In addition, both trusts may also offer significant tax and probate advantages when structured properly.
Charitable lead trust: A charitable lead trust provides payments to a charity for a specific period of time after which the assets that remain in the trust pass to a non-charitable beneficiary. Often, the lead interest (portion that is paid out to the charity) will qualify for a charitable tax deduction if the trust is a living trust. An example of a lead trust is as follows: You fund a trust with $500,000. The trust terms call for 5% of the trust assets to be paid out to a charity each year for ten years with the remainder interest paid to your children upon termination of the ten year term.
Charitable remainder trust: A charitable remainder trust works in reverse of how a charitable lead trust operates. Both a charitable and non-charitable beneficiary are designated. The non-charitable beneficiary receives a portion or percentage of the trust for a specified period of time after which the remainder interest passes to the charity. In the above example, assume that the trust terms call for $2,000 to be paid to your nephew each year for his lifetime. After his death, the remaining trust assets will then pass to the named charity.