In a charitable lead trust, the lifetime payments go to the charity and the remainder returns to the donor or to the donor's estate or other beneficiaries. A donor transfers property to the lead trust, which pays a percentage of the value of the trust assets, usually for a term of years, to the charity. Unlike a charitable remainder trust, a charitable lead annuity trust creates no income tax deduction to the donor, but the income earned in the trust is not attributed to donor. The trust itself is taxed according to trust rates. The trust receives an income tax deduction for the income paid to charity.
What is a Charitable Remainder Trust for Dummies? If you're unfamiliar with the concept of a Charitable Remainder Trust (CRT) and need a simplified explanation, this guide is here to help. A CRT is a legal arrangement that allows individuals to provide for their financial needs while also contributing to charitable causes close to their hearts. This "trust for dummies" article aims to clarify the basic mechanics of CRTs and highlight different types that exist. In simple terms, a CRT involves transferring assets, such as cash, real estate, or stocks, into an irrevocable trust. The person who establishes the trust, known as the granter, chooses one or more charities as the eventual recipient of the remaining trust assets. During the trust's term, which could be the lifetime of the granter(s) or a specified number of years, the granter or other chosen beneficiaries receive annual payments or a fixed percentage of the trust's value. Now that we've covered the basic concept, let's delve into some common types of Charitable Remainder Trusts: 1. Charitable Remainder Annuity Trust (CAT): In this type of CRT, the granter receives a fixed annual income based on a predetermined percentage of the initial trust's value. Regardless of how the trust investments perform, the granter's income remains the same throughout the trust's term. 2. Charitable Remainder Unit rust (CUT): Unlike a CAT, a CUT's annual payouts are based on a fixed percentage of the trust's assets' value that is revalued annually. If the trust assets appreciate, the granter's income increases, but it may decrease if the assets depreciate. 3. Net Income with Makeup Charitable Remainder Unit rust (TIMEOUT): Timeouts offer more flexibility in terms of income distributions. Grants receive either the trust's net income or a fixed percentage of the trust's value, whichever is lower. Any income shortfall in a year can be "made up" in future years when the trust's income exceeds the fixed percentage. 4. Flip Charitable Remainder Unit rust (FLIP CUT): This CRT starts as a Net Income with Makeup Unit rust and "flips" into a standard CUT at a predetermined event, such as the sale of a particular asset or reaching a certain age. Once flipped, the trust begins distributing a fixed percentage of its assets' value. 5. Charitable Remainder Lead Trust (CULT): In contrast to the previous types, a CULT distributes income to charitable organizations for a specified number of years or until the granter's death. After this term ends, the remaining assets are passed on to non-charitable beneficiaries, such as family members or friends. By providing this overview of different types of Charitable Remainder Trusts, this article aims to simplify a complex topic for those unfamiliar with trust law. Remember, consulting with an attorney or financial advisor experienced in estate planning is essential when considering the establishment of a CRT or any other trust structure.
