Charitable Lead Trust

The Charitable Lead Trust is one of the most powerful ways to simultaneously generate benefits for you, your family, and for your favorite charity.  The design of a Charitable Lead Trust is also quite flexible; donors should recognize the array of options as a positive benefit, particularly when coupled with the guidance of appropriate advisors. 

What is a Charitable Lead Trust?

1. Assets valued at $1,000,000 or more are contributed irrevocably to a trust.  The donor chooses the terms of the trust and other specifications.
2. A fixed percentage of either the trust’s initial contribution or annually determined value is paid to your favorite charity.
3. When the trust term ends, the remaining assets, including any appreciation or depreciation in the assets, returns to either the donor or (more often) to designated heirs.


There are two basic types of Charitable Lead Trusts: a grantor trust and a
non-grantor trust.

What are the benefits of a non-grantor Charitable Lead Trust?

Most often, donors will establish a non-grantor trust that passes assets to their heirs.  In doing so, the donor is making a gift in the future to the heirs – as well as a charitable gift of the income stream paid from the trust.
Benefits of a non-grantor Charitable Lead Trust:

• The value of the gift taxable to heirs is reduced or discounted, because the heirs will not actually receive it until some time in the future.
• The taxable value of the gift is also offset by a deduction for the present value of the payments that will be made to charity.
• The combination of discounting and the charitable deduction can substantially reduce – or even eliminate – gift taxes on the gift made to heirs.
• Any appreciation in the value of the trust assets, after the payments to charity are made, will pass to heirs free of gift and estate tax (generation-skipping tax may apply in some situations.)
• The after-tax estate passed to heirs may actually exceed the net estate if you had passed the assets outright, subject to transfer taxes.
• Income earned from trust assets is not included in your individual taxable income.
• The charitable payments from the trust can fund current needs and projects of the your favorite charity.

What are the benefits of a grantor Charitable Lead Trust?
Grantor Charitable Lead Trusts usually return the trust assets to the donor.  The donor will receive an income tax charitable deduction at the time the trust is established, for the present value of the payments to your favorite charity.  The donor, however, must pay taxes on all trust income, including the portion that is paid to your favorite charity.  One option for minimizing taxes is to fund the trust with tax-exempt bonds.  The donor benefits by making a current stream of gifts to your favorite charity without relinquishing ultimate control and enjoyment of the asset(s.)

Can I create a Charitable Lead Trust for heirs and get both income and gift tax deductions?

Due to differences in income tax and gift/estate tax regulations, it may be possible to have a Charitable Lead Trust classified as a grantor trust, earn an income tax deduction, and still name heirs as the beneficiaries.

What are some other opportunities for using a Charitable Lead Trust?

In the case of closely held stock or other business interests, the Lead Trust offers an opportunity to retain ownership and control within the family.  To minimize gift and estate taxes, the Lead Trust may be used in combination with other estate planning techniques, such as a family limited partnership or family dynasty trust. 

How can your favorite charity’s Office of Gift Planning be of assistance?

Most charities have planning specialists, and they have the resources available to support both your investigation and implementation of gift planning techniques.  Their services are professional, confidential, collaborative, and are provided without cost or obligation.  Our Little Rock tax planning attorneys encourage you to call on your favorite charity and our firm to assist you, your family and others in exploring financial, estate, and charitable planning. 
Opportunity:

A donor places $1 million in a non-grantor Charitable Lead Annuity Trust.
The trust will pay 6% of the contribution, or $60,000, annually to your favorite charity.
The donor’s 2 children will receive the Lead Trust assets in 20 years.

Results:

Children receive over $1.8 million from Lead Trust (8% annual investment return assumed.)
Gift tax deduction is $944,250.
Taxable gift to children is only $55,750, minus available exclusions.
The donor’s gift credit at your favorite charity is $1,176,980 in the year of the contribution.
The results in this example may vary based on time of gift and other factors.

Better planning for a better future™

Let the Plastiras Law Firm help you achieve it.  Whether you are looking for a Charitable Lead Trust, advice or help with other legal matters, call us at 501-859-0986.