When thinking about how you might want to pass down assets to the next generation, trusts are often an attractive option. Trusts are very different from other forms of charitable giving that can be incorporated into your estate plan. They fall into one of two general categories: a charitable lead trust and a charitable remainder trust.
A charitable remainder trust is somewhat easier to understand: you make a gift to the trust and it’s like purchasing an annuity – you put money into the trust and over the course of your lifetime it pays back a percentage. When you die, whatever is left in the trust at that time will then go to the charity you’ve selected. This option does involve quite a bit of math, as you will have to figure out the value of the gift to the charity and, of course, this also requires you to figure out what your life expectancy is. Once you have completed those calculations and formed the trust, you are able to receive a charitable deduction on your tax return for the net present value of that gift.
A charitable lead trust is essentially the opposite of a charitable remainder trust: you’re continuing to put money into a trust and the charity is getting the benefit of that annuity stream and at the end, whatever is left then goes back to your beneficiaries. These options are dependent upon some additional considerations, like interest rates, to determine whether they make sense for your estate plan because they are subject to IRS regulations and thus expensive to create. In most instances, this type of trust only makes sense in situations where there is a decent amount of money (over $250,000) being considered.
Choosing between a charitable remainder trust and a charitable lead trust is largely a matter of assessing your whether your current income would support a large deduction now or if your estate will be too large and you’ll want that deduction at the end. Of course, this also ties in with what we discussed in How to Designate an Organization as Beneficiary and the fact that many organizations are prepared to assist you in the process. Some organizations will set up charitable gift annuities, which are like having your own charitable remainder trust, but you don’t do the paperwork by yourself, and you aren’t responsible for compliance over time.
Another strategy worth mentioning is a donor-advised fund (DAF). The organizations that you can do this with range from local foundations, such as the New Hampshire Charitable Foundation, to large financial institutions like Vanguard, Fidelity, Charles Schwab, and others. The process starts with signing an agreement with the organization sponsoring the DAF and then you’re able to put money into it over time as you see fit. You are then able to advise the fund on what gifts that fund should make each year, so long as it aligns with the rules of the DAF (such as which types of nonprofits will qualify). Oftentimes, choosing a DAF is a great option for someone who thinks they want to establish a foundation, which are on the opposite end of the spectrum in terms of complexity.