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Charitable Lead Trusts
A Charitable Lead Trust is for you if...
- You're considering a gift in partnership with Children's.
- Your planning objective is estate preservation.
- You want to reduce gift and estate tax rather than income tax.
About Charitable Lead Trusts
A lead trust holds appreciating assets, pays income to Children's for a period of years, and then passes the remaining principal back to you – the version known as a grantor lead trust – or to beneficiaries you have selected – the non-grantor lead trust. The non-grantor lead trust offers you more significant tax benefits, and we will primarily focus on its features here.
The non-grantor lead trust reduces the cost of passing property to your heirs in two ways:
- The value, for estate and gift tax purposes, of the assets you place in your lead trust will be reduced by the present value of the income that the trust will pay Children's.
- The taxable value of the lead trust's assets is fixed at the time you establish the trust – any subsequent increase in the value of the assets will pass to your heirs outside your estate and thus free of estate or gift tax.
This combined reduction in the taxable value of the assets means that your family can often receive more from an estate plan containing a non-grantor lead trust than they could from an outright bequest from you.
The lead trust also offers you these additional features:
- It can be funded with shares in a growing family business, thus lowering the tax cost of passing ownership on to the next generation.
- The income earned by a non-grantor lead trust while it is in operation is not taxable to you.
- The trust can run for a term of years or for your lifetime.
- The lead trust is the only income-gift that delivers immediate benefits to Children's.
- The longer the lead trust pays Children's income, and the more income it pays us, the larger your estate and gift tax deduction will be.
Example
This example is based on a factor that changes monthly. Contact our office for a personal illustration based on the latest rates.
Your business is on a growth track, and your children are learning the ropes fast. Your planning priority is to keep the enterprise that you worked so hard to establish intact for them to inherit and enjoy.
As your gift to Children's , you place $500,000 worth of your company's stock in a non-grantor lead trust. The trust will pay Children's Hospital a 6% annuity for 20 years, either in dividends or in additional shares of stock. You estimate that you will have additional assets totaling $1,500,000 after 20 years, and that your assets will grow at an average rate of 5% per year. You have already given your children the maximum that may be transferred free of gift and estate tax.
Here are the benefits to you and your family of the lead trust, compared with those of a direct bequest to the children and no gift to us:
| Comparison | Lead Trust | No Gift |
|---|---|---|
| Principal | $500,000 | $500,000 |
| Annuity to Children's | $30,000 | 0 |
| Present value of 20 years' annuity payments to us | $312,940 | 0 |
| Gift Tax (paid by donor in year of gift) | $70,453 | 0 |
| Value of lead trust after 20 years | $1,507,526 | 0 |
| Donor's taxable estate in 20 years | $1,429,547 [1] | $3,914,749 [2] |
| Total federal estate tax | -$553,387 | -$1,791,862 |
| Net distribution from estate | $876,160 | $2,112,877 |
| Add lead trust balance | +$1,507,526 | 0 |
| Total distribution to family | $2,383,686 | $2,112,887 |
| Total distribution to Children's | $600,000 | 0 |
[1]: Assets of $1,500,000 minus $70,453 gift tax paid in 2002. The $1,507,526 balance of the lead trust is excluded from the donor's estate.
[2]: Appreciated value of $500,000 plus additional assets of $1,500,000.
How Do You Create a Charitable Lead Trust?
Setting up a charitable lead trust is not particularly difficult, but you should be advised by an attorney with expertise in the area of charitable trusts and estate planning. To save you time and expense, we can provide you with an initial draft of the lead trust agreement for review by you and your attorney. Once your trust agreement is signed, you can fund your lead trust by transferring assets to your trustee.
For More Information
Complete the personal illustration form or contact us so that we can assist you through every step of the process.
This is not professional tax or legal advice. Donors must consult their tax and legal advisors regarding their specific situation.