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You’re considering a gift in partnership with your favorite charity > Your planning objective is estate preservation > You want to reduce gift and estate taxes rather than income tax
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From quality elder care to higher education,
your values are preserved and passed on when
you include charity in your estate plan. |
A lead trust holds appreciating
assets, pays income to your favorite charity for
a period of years, and then passes the remaining
principal back to you – (a grantor lead
trust) or to beneficiaries you have selected
(a 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. First, 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 to your favorite charity. Second, 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 charitable trust that delivers
immediate benefits to your favorite charity.
- The longer
the lead trust pays your charity income, and
the more income it pays them, the larger your
estate and gift tax deduction will be.
- Many
charities can serve as trustee of your lead
trust, or you or a financial advisor can serve
as trustee.
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Example
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 your favorite charity, you place $500,000 worth of your company’s stock in a non-grantor lead trust. The trust will pay the charity a 6 percent 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 in 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 of the lead trust to you and your family, compared with those of a direct bequest to the children and no gift to charity:
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Comparison
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Lead Trust
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No Gift
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Principal
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$500,000
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$500,000
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Annuity to Your Charity
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$30,000
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-0-
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Present value of 20 years’ annuity payments to Charity
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$312,940
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-0-
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Gift Tax (paid by donor in 2002)
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$70,453
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-0-
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Value of lead trust in 2022
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$1,507526
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-0-
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Donor’s taxable estate in 2022
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$1,429,547[1]
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$3,914,749[2]
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Total federal estate tax
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-$553,387
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-$1,791,862
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Net distribution from estate
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$876,160
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$2,112,877
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Add lead trust balance
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+$1,507,526
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-0-
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Total distribution to family
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$2,383,686
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$2,112,887
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Total distribution to Charity
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$600,000
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-0-
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[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.
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 Click
here
to
calculate the
benefits a lead trust
would give you.
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Tips on Creating 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. Many charities can provide you with an initial draft of a 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 charity or to another appointed trustee.
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