Charitable trusts are useful tools for those who want to support a cause while also managing their finances. Two of the most common types are charitable remainder trusts and charitable lead trusts.
While both involve giving to charity, they work in very different ways. Here are some of the key distinctions.
What is a charitable remainder trust?
A charitable remainder trust permits an individual to donate assets to a trust but still receive income from it. The donor, or someone they name, receives payments from the trust for a set number of years or life. After that designated period ends, the remaining assets go to the chosen charity.
This type of trust can provide income during retirement, help reduce taxes and support a favorite cause in the future. It typically includes assets that increase in value, such as stocks or real estate.
What is a charitable lead trust?
A charitable lead trust works in the opposite way. The trust gives income to a charity first, for a set number of years. Once that time is up, the remaining assets go to non-charitable beneficiaries, such as the grantor’s children or other family members.
This structure can help reduce the amount of gift or estate taxes that might be owed when passing assets to others. It allows someone to support a cause now while also planning for their family’s financial future.
The main difference between these trusts is who gets the income first. A charitable remainder trust supports the donor first, then the charity. A charitable lead trust supports the charity first, then other beneficiaries. Both offer flexible ways to give, depending on a person’s goals and timing. To ensure you set up the right trusts for your circumstances, it helps to seek legal guidance.