When executives are faced with the challenge of planning out the legacy they would like to leave, it can be a daunting task. How do you ensure your loved ones are cared for, but still impact causes you believe in? In estate planning, there are many methods and strategies to choose from and utilize. Which route to take is not an easy choice, don’t let anyone tell you otherwise.
When it comes to leaving a charitable legacy, there are two types of trusts we implement often with our executive clients: charitable lead trusts and charitable remainder trusts. Both types of trusts can accomplish the same thing in the long run—help you to leave a charitable legacy—but each takes a very different road to get there. When choosing one of these strategies for your estate plan, it is helpful to know the differences between a charitable lead trust vs. charitable remainder trust. You should also understand different scenarios in which one might make sense over the other.
Meet with the Carpenter Team to ensure your estate plan reflects your charitable giving goals.
Charitable Lead Trust vs. Charitable Remainder Trust: Key Differences
A charitable lead trust and a charitable remainder trust are essentially exact opposites of each other.
A charitable lead trust is designed to generate an income stream for a particular charity for a set duration, typically from the time a donor sets up the trust to the time of the donor’s death. When the donor passes away, the remaining assets held in the trust are distributed to a family member or other party identified by the donor.
In contrast, a charitable remainder trust is designed to generate income for a particular person (almost always the donor and his or her spouse) for the duration of their lifetime. When the people receiving that income pass away, the remaining assets held in the trust are donated to the charity designated by the donor.
Either one of these types of trusts can be an annuity trust or a unitrust. This can seem a little confusing at first, but just remember that both terms refer to the assets held within the trust, not the trust itself. For example, an annuity trust utilizes an annuity to generate a fixed annual income that is paid to either the charity or the person, depending on the type of trust. A unitrust utilizes variable investments that generate a varying annual income depending on the performance of the investments.
This is a general overview of the underlying investments of both trust types. It’s important to remember that either type of trust is best implemented with the help of a trusted estate planning attorney in conjunction with your financial advisor.
Now let’s explore some examples where one type of trust might make sense over the other in regards to your charitable gifts planning and estate plan.
When a Charitable Lead Trust Makes Sense
Let’s say we are working with a client named Jeff. Jeff is nearing retirement and already has his retirement income taken care of due to a generous pension plan from a prior employer along with some real estate income properties and his Social Security income. He feels very confident that he and his wife will live out a comfortable retirement. However, he also has a large portion of employee stock he earned from his current employer, and he really does not have a need for this asset during his retirement.
He and his wife are on the board of a local non-profit and also are active with other charities throughout the country as donors and volunteers. They know that many charities need income now rather than when they pass on. They would like to help these causes, but they aren’t sure exactly how to do that. They also want to leave some of that company stock for their two children because Jeff believes his family made sacrifices at times during his career to help him earn it. He and his wife are torn between donating all of the stock to charity or leaving it behind for their children.
The great thing about Jeff’s company stock is that it pays a generous annual dividend, which could be held within a trust (making it a unitrust) and paid out each year as income. In Jeff’s case, it would make sense for him to take advantage of a charitable lead trust due to his urge to give to charity now as well as leave an inheritance for his children.
The charitable lead trust would pay out the annual dividend from his company stock to the charity of his choice and leave the remaining stock principal to his children. This is a win-win scenario for the charity and Jeff’s family. The one thing his children will need to consider is that the assets transferred to them could be taxable as gifts. For the best taxable outcome, it is important to work with a financial advisor who will work closely with your CPA to guide you through your decision.
When a Charitable Remainder Trust Makes Sense
Let’s take a look at a different example in which it might make more sense to utilize a charitable remainder trust vs. a charitable lead trust. For this, let’s imagine we meet with a hypothetical client named Joe.
Joe is a top-level executive at a local company, and he and his wife are getting ready to retire. He is planning to use Social Security as income as well as some other retirement savings, and a sizable amount of appreciated company stock from his employer. He has accumulated this stock over many years of service and now holds a high concentration of it in his portfolio. He’d like to put this to work during his retirement.
Joe and his spouse donate to charity here and there, but would really like to leave a legacy using some of his accumulated wealth by donating to one of their favorite charities. The only problem is that Joe knows he will need to use some of his stock to generate retirement income to supplement his other income streams.
One of the great benefits of using a charitable remainder trust is that it removes the asset (in Joe’s case, the company stock) from your name. This would allow him to place the appreciated stock in the charitable remainder trust and allow the trust to sell the stock to purchase an annuity to generate retirement income for him and his wife.
Because the asset is sold by the trust, he will not incur taxation from the sale of the stock. Once the stock is sold and the income stream is turned on, Joe and his wife will receive a set annual income for the rest of their lives. When they pass away, the remainder of the asset will be donated to the charity of their choice.
Choosing a Charitable Lead Trust vs. Charitable Remainder Trust
In both of the above examples, the clients were able to achieve their lifelong dream of greatly impacting a charitable cause they are passionate about while still providing for the needs of their families. This is by far the best aspect of both a charitable remainder trust and a charitable lead trust. To choose the best option for your unique situation, be sure to work with an experienced executive financial advisor who has worked with estate planning attorneys to implement these types of plans for their clients. In doing so, you can feel confident you’re doing the best for your family and the charities you believe in.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for estate planning and charitable gift planning.
Are these strategies right for you? Reach out to the Carpenter Team today for a complimentary consultation. We can meet with you in person or online.
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