Charitable Lead Trusts

Do you want to benefit from the tax savings that result from supporting your chapter, yet you don’t want to give up any assets that you’d like your family to receive someday? You can have it both ways with a charitable lead trust.

There are two ways charitable lead trusts make payments:

  1. A charitable lead annuity trust pays a fixed amount each year to the chapter and is more attractive when interest rates are low.
  2. A charitable lead unitrust pays a variable amount each year based on the value of the assets in the trust. With a unitrust, if the trust’s assets go up in value, for example, the payments to the chapter go up as well.

How Does It Work?

With this type of planned gift, you irrevocably transfer assets to a charitable lead trust. The trustee makes an annual distribution from the trust to the chapter for a set number of years. When the trust terminates, the assets in the trust are distributed to your heirs or others that you designate. The chapter can serve as trustee of charitable lead trusts.

On the date you establish the trust, the future gift to your heirs will be valued for gift and estate tax purposes at its “present value.” If the trust is created when interest rates are low and the trust’s investments perform better than expected, there may be additional assets in the trust that will pass to your heirs free of estate and gift taxes.

Benefits

  • Pass assets to your heirs at low (or no) estate and gift taxes
  • Make annual gifts to the chapter

Assets Used

Usually cash or assets that have a likelihood of significant appreciation in the future.

Advisor

Those considering a planned gift should consult their own legal and tax advisors.

EXAMPLE

John Doe is in high tax brackets for income, gift, and estate tax, and he has used up all of his gift tax exemption for lifetime gifts. If he makes an additional outright gift now to his children, he will incur substantial gift tax. If he defers making gifts to them, and the assets meanwhile appreciate in value—as he expects they will—the eventual gift tax or estate tax could be even higher, because the tax will be based upon the appreciated value of the assets at the time of the gift.

He also wants to support the chapter. Instead of giving the assets directly to his children, in August 2012, Mr. Doe funds a charitable lead annuity trust with assets currently valued at $1 million. The trust will pay a fixed 6.0% annuity ($60,000) to the chapter for 20 years, and then the remaining assets will be distributed to his children. Because the IRS assumes that the trust investment performance will be only 1% over time, the IRS predicts that there will be nothing left in the trust at the end of 20 years, so the value of the gift to his children would be calculated to be zero. On the other hand, if the trust investments grow more than 1% over time, there will be assets left in the trust, and those assets will pass free of income and estate tax to his heirs.

 

Learn how you can support your chapter by contacting Matt Noble of Fraternity Management Group at matt.noble@fmgtucson.com.