A lead trust allows a donor to put assets into trust and promises to make gifts from the trust to charity for a number of years. At the end of the trust term, the donor’s children receive the remaining principal. The longer the trust and the higher the percentage given to charity, the lower the gift tax due on the transfer to the children.

Families can use these trusts to make large gifts to their children while they are still young. A trust set up on a child’s fifth birthday could be designed to transfer one million dollars or more on the child’s thirtieth birthday – free of tax. Many people find this far more useful than transferring money at death.

Many lead trusts name a single charity to receive the annual gifts. These grants may replace pledges, gifts the donor was already making or add to the amount of their annual giving.

One technique is to make the annual gifts to a donor-advised fund ("DAF"), a “charitable checking account” from which the donor can direct gifts to non-profit organizations of their choice. This set-up works well if the parents want to involve their children in the philanthropic process. Research shows that children involved with their parents’ philanthropy from a young age handle money more responsibly. The time spent discussing which non-profit are important to the parents and which causes the children care about are an opportunity to share family values.

Parents are able to use the combination of the charitable lead trust and the DAF to channel both personal capital and social capital to their children, while educating them about how to handle wealth and give back to society.

Charitable lead trusts are most attractive in times of low interest rates. The lower they are, the larger the value the IRS places on the annual charitable gifts made and the gift tax due on the remaining principal is lower.