Charitable lead trusts are designed for people who wish to financially assist a nonprofit prior to their death. The trust is designed to reduce beneficiaries' taxable income by first donating a portion of the trust's income to a nonprofit organization, and then, after a specified period, transfer the remained of the trust to family members or beneficiaries. It's important to consult your financial advisor to learn about charitable trust strategies and how they can make an immediate impact on a nonprofit organization while still offering tax benefits with a significant gift.
If you've made outright contributions to your favorite nonprofit or typically sell an investment, giving all or a portion of the money to the nonprofit, you may be interested in the special advantages of a charitable trust. Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for nonprofit organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.
Those who give also get an immediate charitable income tax deduction based on the “life expectancy” of the gift. With a charitable lead trust, the charity receives the amount of income from the asset, that is designated by the donor, not the asset itself. The deduction is based on the rate of return the nonprofit can expect to receive, the duration of the trust and the IRS tables used in the calculation. Your write-off will be limited to a portion of adjusted gross income but can be carried forward to future years.
With a charitable lead trust, the income from the reinvested assets will then go directly to the nonprofit that will receive distributions for the duration of the trust. The duration may be a set number of years, your lifetime, or the lifetime of someone else. At the end of this period, the remainder of the trust can be retained by you or transferred to your beneficiaries.
A charitable lead trust may also reduce challenging family issues over inheritance. By giving funds to the chosen nonprofit organization during your lifetime and making your family aware of your wishes prior to your death, the potential for disagreement could be avoided at a very difficult time.
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