How Does A Charitable Lead Trust Fund Differ From A Remainder Fund?

Many people have the luck, fortune or skills to accumulate considerable wealth in their own life time. Some succeed relatively early in life and others, possibly more prudent in nature, invested money in properties of on the stick market, which they re-invested until they had accumulated a considerable property or share portfolio.

Until the US congress passed legislation in 1969, people who wanted to realize profits earned from such portfolios were liable to pay capital gains tax on moneys earned. This could amount to a very significant percentage of the profits earned and caused considerable negative feeling. The legislation passed meant that any funds donated to a charitable trust were actually taken out of the clutches of the Internal Revenue Services, and were channeled towards charities of the donor's choice. A charitable lead fund can exist for as many years as the donor decides. Obviously the time set will be considerable.

The only drawback with this system for the donors was that the donation, once made was totally irreversible. Acting through a trustee, the donor is entitled to draw a percentage of the income of the trust fund each fiscal year. This sum can range from between 5% and 50%, depending on certain criteria set by the IRS.

This criteria is based on either a fixed dollar amount or a percentage of the assets. During the fiscal year that the charitable lead fund has been set up, the IRS calculates the fund's assets and how much of a return it should generate in the coming year. This sum is usually based around Treasury bond's annual interest rates. However if the trustee of the fund uses the capitol well enough then the returns can be higher.

One of the biggest drawbacks with this type of fund, known as a Remainder Trust Fund, is that siblings of the donors were disallowed entirely from enjoying any of the benefits from the profits earned by the fund. This meant that the donors had to plan their estate to take this into account. There may have been cases where the donors reluctantly had to decide not to set up a trust fund, and instead pay the capital gains tax on their portfolio earnings. This was principally to ensure that their estate would amply provide for their children once the donors had passed away.

To plug this gap, legislation was passed that allowed for the setting up of a Charitable Lead Trust Fund, which differed slightly in its concept. In this legislation, a charitable lead trust offers exactly the same levels of income tax deductions and the same generous reduction of capital gains tax levels. The principal difference is that a charitable lead trust fund alters the way the funds are dissipated. In their lifetimes, the donors take second place to the nominated charities, who receive the bulk of the funds. After the donors pass away then their children and other named beneficiaries receive the bulk of the income from the fund with the nominated charities taking second place.