Charitable Lead Trust - Explained
What is a Charitable Lead Trust?
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What is a Charitable Lead Trust?
A charitable trust is a form of irrevocable trust which is developed to mitigate or cause a decline in the taxes to be paid by the beneficiary of an inheritance in the advent of a transfer of property.
How Does a Charitable Lead Trust Work?
In a charitable lead trust, the taxpayer tries to mitigate taxes by donating payments to a charity for a designated period of time. At the end of such duration, the balance of the trust is the transferred to the heir or named beneficiary of the taxpayers property. This method helps the beneficiary prevent large taxes and other deductions that would've been charged on a normal inheritance. Also, it provides the beneficiary with income tax deductions granted to charitable donations, and also on savings on estate and gift taxes. It also provides both the benefactor and the beneficiary a simpler way to make monthly contributions to the charitable organization without setting it up manually. Charitable lead trusts are generally set up during the process of estate planning or during the writing of a will, especially when the benefactor is looking for means to reduce any potential burden of tax on beneficiaries when they get a willed or transferred inheritance. Setting up a charitable lead trust shouldn't be much of a hassle, as any qualified attorney can easily generate these types of trusts in an estate planning process. Furthermore, the cost of setting up a charitable lead trust isn't too expensive, as one can start the process for around $1000.
What is a Charitable Remainder Trust?
There are little differences between a charitable remainder trust and a charitable lead trust. While the former takes payment on a monthly basis, a charitable remainder trust can also make monthly payment to the beneficiary and in some cases, they can include the benefactor in the monthly payments. However, the amount that can be paid to both the beneficiary and the benefactor must be between 5% of the balance of the trust (which is the minimum amount that can be paid) and 50% of the trusts balance (this is the maximum amount that can be paid out). Unlike most trusts that are built for inheritance transfer, a beneficiary or a benefactor can continue making payments into the trust with time. So, it doesn't need to be an upfront all-for-one payment. In a charitable remainder trust, the benefactor might be qualified to pull out some amounts, or make deductions to set up the trust. He or she can fund the trust via stocks, cash, publicly traded securities and company assets, real estates, bonds, and other financial assets and equities. Just like the charitable lead trust, the charitable remainder trust gives beneficiaries the access to take advantage of the contributions that they make to an organization or institution. According to law, a charitable remainder trust has a maximum holding period or lifetime of 20 years. Thus, when 20 years from the date of creation is up, the trust must pay out the balance to the beneficiary named by the taxpayer or establisher of such a trust. The trust in question can either be made with a private organization or a public institution. In a charitable remainder trust, the groups or charities can be changed over time, possibly due to personal or corporate issues, unlike that of a charitable lead trust. In a charitable lead trust, all parties involved must stick to the details and groups initiated or stated in the contract as at the time of signing or at the point of the initial establishment of the trust.
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