Charitable Lead Trust
If your goal is to provide an inheritance to your children but you would also like to make a charitable gift to FAIR through your estate, then you should consider the charitable lead trust.
A charitable lead trust is a trust that you establish either during your life or through your will. The income from the trust flows to FAIR, typically for a stated number of years. After that period, the assets inside the trust are then distributed to your beneficiaries.
This type of trust is a very flexible plan and can be one of the few ways to control exactly when an inheritance is received, while reducing or eliminating taxes and probate expense that might otherwise be due on assets left to children, grandchildren, or others.
Under terms of the charitable lead trust, assets are transferred to a trust that pays income to one or more charitable recipients for a number of years you determine. At the end of that period the assets are returned to you or transferred to others you name.
Tax Benefits
The fact that the assets will one day be transferred to another person means that this trust has one important distinction: it is a "nongrantor" trust, as opposed to a grantor trust. "Nongrantor" means the trust assets are not owned by the person who established the trust, and the assets are not going to be returned to him or her someday. Therefore, the nongrantor does not have to pay tax on the assets. (A "grantor" trust is one in which the assets will eventually be distributed back to the donor. As a result, the donor is subject to tax on the assets.)
Of all the charitable vehicles available to donors, the charitable lead trust is among the most complex. However, a nongrantor lead trust does offer the advantage of providing excellent tax benefits to the estate owner.
Example
Mrs. Swain, 75, has been advised that her estate could be subject to significant amounts of tax at her death. She has four grandchildren, ages 17 through 27. After conferring with her advisors, Mrs. Swain decides to create a trust in her will that will pay an annual sum to FAIR for 15 years, with assets then passing to her grandchildren largely free of any estate tax that may otherwise be due at the time of her death. In this way, Mrs. Swain honors Mr. Swain’s memory while ensuring that assets will ultimately pass to her grandchildren.