Planning For A Secure Future

Charitable trusts are versatile estate planning tools

On Behalf of | Dec 10, 2023 | Trusts

There are many reasons why California residents may choose to include charitable trusts in their estate plans. These versatile tools can be used to donate assets to charities and transfer wealth to children, and they may also reduce or even eliminate estate taxes. There are two types of charitable trusts. Charitable remainder trusts are used to distribute assets to noncharitable beneficiaries, and charitable lead trusts are used to donate assets to charities.

Charitable remainder trusts

Charitable remainder trusts distribute assets to noncharitable entities annually for a preset period of time. These trusts are commonly structured to distribute assets for 10 years, but individuals can choose longer or shorter periods if they wish. The annual distributions must account for between 5% and 50% of the fair market value of the trust’s total assets, and any assets remaining after the last distribution has been made are donated as a lump sum to a charitable beneficiary. This charitable beneficiary can be one or more charities, a donor-advised fund or a family foundation. This kind of trust does not eliminate all estate taxes, but it does provide a sizeable charitable deduction.

Charitable lead trusts

The assets in a charitable lead trust are distributed to one or more charitable beneficiaries annually. Like charitable remainder trusts, charitable lead trusts are structured to distribute assets for a designated period of time. When all of the distributions have been made, any assets remaining in this type of charitable trust are distributed to a noncharitable beneficiary as a lump sum. This type of trust can provide a 100% charitable deduction for estate taxes.

Estate planning

A carefully constructed estate plan can prevent disputes between heirs and ensure that the testator’s wishes are respected. Charitable trusts are versatile estate planning tools that can be used to distribute assets to charities or other beneficiaries and reduce estate taxes. Charitable trusts are particularly useful in states like California where asset values often exceed the federal estate tax exemption.