Charitable Lead Trusts
A transfer of assets (cash, securities, real estate, or other property) to a trustee. The trustee can hold the assets or sell them to provide income to a charity for a term of years. At the end of the term, the property reverts to the donor or the donor's designee.
What is a charitable lead trust?
A Charitable Lead Unitrust provides variable payments to charity equal to a fixed percentage of the annual asset value of the trust. A Charitable Lead Annuity Trust provides fixed payments to charity equal to a stated amount. The unitrust or annuity amount must be paid to a qualified charity at least annually.
What are some benefits of charitable lead trusts?
Lead trusts are very appealing income and wealth transfer vehicles for donors with estates of several million dollars or more. The tax benefits are particularly appealing when the IRS floating interest rate (used to compute a charitable deduction) is low. Lead trusts are typically drafted for a term of years selected by the donor.
A Grantor Lead Trust, is a useful tax savings device for assisting charity with periodic trust payments for several years. Property placed in the trust reverts to the grantor (donor) when the trust terminates. The grantor receives an income tax charitable deduction at the time property is transferred to the trust. In addition, though trust income is taxable to the grantor, taxation can be avoided by funding the trust with tax-exempt municipal bonds.
A Family Lead Trust or Non-Grantor Charitable Lead Trust is used to assist charity while reducing or avoiding the gift and estate transfer tax on property placed in trust and later transferred to family (or others). The Family Lead Trust channels future appreciation to heirs without further estate and gift tax liability.
What are some details and tax issues regarding charitable lead trusts?
For the Grantor Lead Trust, the charitable income tax deduction equals the present value of the future payments to charity and is limited to 30 percent of Adjusted Gross Income (plus up to 5 carry-forward years). There is no income tax charitable deduction unless the income earned by the trust is reportable on the grantor's personal income tax return.
The Family Lead Trust is a separate taxable entity. All income, less the amount distributed to charity, is taxable to the trust. There is no income tax deduction. However, since income is taxable to the trust, it is effectively removed from the donor's personal income tax return and circumvents the adjusted gross income percentage limitations. The family lead trust does provide a gift tax deduction equal to the present value of the future payments to charity.
Lead trust payments are not subject to minimum payout requirements. The trustee can make payments in-kind such as appreciated stock, though such payments trigger capital gains tax to the trust.
Contact our gift planning specialist for more information.