Looking for a charitable giving strategy that not only serves as a means of wealth transfer to mitigate estate taxes but also offers continuous financial assistance to your preferred charities? Consider the charitable lead trust.

First, let’s set the stage. This type of trust is usually implemented after other basics are done—things like your will and powers of attorney and health care directive. Also, it is usually, but not always, in the category of trusts set up during your lifetime and not after your death. It's a separate, standalone trust.

Assume we have a couple with some extra money who want to benefit a charity. Here’s how it could work.

The couple has an attorney draft a charitable lead trust. The terms of the trust say that, for the lifetime of the couple or the surviving spouse, the charitable lead trust will annually pay 5% of the trust to a qualified charity. At the death of the surviving spouse, the money left in trust presumably will go to the couple’s children.

Because of the way it is set up, it is referred to as a split-interest gift where a portion of the gift to the trust goes to charity and a portion will ultimately go to the children. Those “portions” are calculated on the date of the gift based on current interest rates and life expectancy tables to actuarially determine the amount of the gift going to the children, which the parents will use to file a gift tax return.

Of course, with limited exception, there is no actual tax assessed on a gift like that, it is just mandatory to report gifts of that size to the IRS. So, in lower-interest rate environments, the calculated—also known as the actuarially determined—amount going to the children will appear to be lower, but the actual amount could be much higher, depending on the performance of the assets in the trust. And, for the calculation, because the amount going to the children appears lower, the calculated amount going to the charity would be correspondingly higher.

Neither the parents nor the children receive anything from the trust during the parents’ lifetime in this scenario. In that sense, the technique is similar to a will; nothing goes to the children until the death of the parents. What makes this technique compelling is the added ability to give to charity and engage in potential wealth transfer tax mitigation.

Now, a quick illustrative example. Assume parents are ages 65 and 66 and that they contribute $1 million to a charitable lead trust. The terms of the charitable lead trust provide that, for the rest of their joint lives, 5% of the trust is paid out each year to the charity of their choice. The calculation changes all the time, but let’s assume it would show a “gift” to the children of somewhere around $350,000 ballpark. The small amount of the gift is predicated on the current interest rate. So, if the trust achieves long-term average market returns of, say, 8% to 9%, but the trust is only paying out 5%, then the trust should actually grow over the term of the trust and transfer more to your children than actuarily calculated. In that case, while the calculation shows a low gift of around $350,000, the actual gift might be well over $1 million. On the flip side, there always exists the possibility that the assets in the trust would underperform the estimated growth and lead to less or even nothing going to the children. Of course, there is uncertainty as to the results of the stock markets, so the technique is not for the faint of heart.

The parents would have to file a gift tax return showing a gift of that actuarially determined value to the kids: $350,000.

Now, most people don’t have to worry about the estate tax as it only applies to people who have large estates. But, if a couple has an estate subject to both the Washington state estate tax and the federal estate tax, the ballpark combined tax burden could be as high as 50%. Accordingly, in the illustration above, assuming historical market performance, the transfer tax savings could be hundreds of thousands of dollars. And, while some people are put off by complex estate planning techniques, the savings speak for themselves. Perhaps a little complexity is worth the estate tax savings?

In addition to the potential to mitigate or eliminate estate taxes, the trust offers another benefit. It potentially provides a consistent and reliable stream of income to your favorite charity for years to come. So, in addition to acting as a legally sanctioned wealth transfer technique, it provides a wonderful benefit to worthy organizations.

Many ask whether they would receive a tax deduction for this type of gift, and while the answer to the question is “maybe,” the explanation is longer and more complex than this space allows.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies, in Kennewick, Washington.