Charitable Lead Trusts: Tax Benefits

Generally speaking, a charitable lead trust is used as a tool for reducing gift and estate taxes rather than as a means of reducing income tax. In the case of a charitable lead trust, the donor pays gift or estate tax only on the actuarial present value of the remainder interest, rather than on the full value of the property, which eventually will go to the donor's beneficiaries. This is because the value of the transfer is determined at the time the trust is funded. Thus, a charitable lead trust can be an effective way to transfer property that is likely to increase in value, since any appreciation of these assets passes to your beneficiaries free of estate tax.

Once the charitable period expires, the trust distributes directly to the beneficiaries named by the donor in the original document.

Generally, no income tax deduction is available for a charitable lead trust -- though trust income is excluded from the donor's taxable income. An exception, however, applies if the charitable lead trust is structured as a "grantor trust" for federal income tax purposes. In this case, the donor receives an immediate tax deduction for the present value of the income that will be paid to charity. On the other hand, all trust income is taxed to the donor each year during the charitable period, just as if no trust existed. (And, if trust assets are invested in municipal bonds, for example, taxable income would be reduced.)

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