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Charitable Lead Trusts
Charitable Lead Trusts offer a way for donors to support the Foundation's programs and transfer substantial assets to beneficiaries (children or grandchildren, for instance) with the potential for significantly lowered gift and estate taxes. A donor's heirs may actually receive a larger inheritance (at a reduced tax cost) than they would through an outright bequest or accumulation trust. Plus, the Foundation receives an immediate flow of income.
With a Charitable Lead Trust, donors transfer property; such as real estate, securities, bonds, partnership interests, oil and gas properties, and the like; to a trust. The trustee may be the Foundation, a bank, an individual or any combination thereof. The trust pays an annual amount (a fixed amount or a percentage of the trust principal as revalued annually) to the Foundation for a specified period. After this time, the property returns to the donor or a non-charitable beneficiary; usually a family member in the next or succeeding generation. The property is generally appreciated and transferred with significantly reduced gift or estate taxes.
Example: Mr. Grey contributes $500,000.00 to a 10-year Charitable Lead Annuity Trust for the Foundation's benefit. The trust agreement stipulates that the Foundation is to receive $30,000.00 in income annually for purposes spelled out in the trust agreement. At the end of the 10-year term, Mr. Grey's son, Mark, is to receive the trust principal. For gift tax purposes, only the remainder interest (what IRS calculates the value of the trust principal will be at the end of the trust period) is subject to tax. In this case, Treasury tables project the value of the remainder to be $292,760.00. The trust principal, however, actually grows to $813,746.00 and this is what Mark receives. The difference between the value of the remainder interest under the Treasury tables and what is actually the trust value at the end of the trust term ($520,986.00) passes to Mark, free of transfer taxes. Mr. Grey's tax liability is based only on the projected value of the remainder interest ($292,760.00). Even this could be offset by Mr. Grey's remaining estate and gift tax unified credit.
A donor may establish such a trust during their lifetime or under their Will. The manner in which a lifetime trust is established, that is, to whom the trust income is taxed, determines whether or not the donor receives an income tax deduction. In cases in which a donor does not receive an income tax deduction, however, the donor may realize other very important financial and estate planning goals.
For certain lead trusts, benefiting a specific nonprofit organization such as the Foundation, donors may obtain an income tax deduction up to 30 percent of their adjusted gross income, with a five-year carry-over of any excess.