Charitable Trusts

Charitable Lead Trusts

  • A charitable lead trust reverses the income payment pattern common to life income gifts.  Charity takes the “lead” because the trust makes payments to your organization first, then returns the remaining assets to the donor, the donor’s family, or others the donor designates.

  • A lead trust can run for a term of years or for the donor’s lifetime.  It can be created during the donor’s lifetime or under the donor’s will.

  • If the trust is set up as a “grantor” lead trust under tax law, the donor will receive an immediate charitable income tax deduction for the present value of the income stream the trust will deliver to your organization in the future.  However, the trust’s annual income will be taxable to the donor.  The upfront deduction may be offset by the subsequent taxable income unless the trust was, for example, funded with tax-exempt municipal bonds.

  • “Grantor” lead trust are attractive to individuals who want to offset current high earnings with a large charitable deduction, and expect the future trust income will be taxable when they may be in a lower tax bracket.  The remainder of a “grantor” lead trust may be returned to the donor or directed to beneficiaries other than the donor.

  • If the trust is set up as a “non-grantor” trust under tax law, the donor won’t receive a current income tax deduction and won’t be taxed on the trust’s future income.  The remainder of a “non-grantor” lead trust must be directed to beneficiaries other than the donor.

Donors can lower the estate and gift tax cost of passing assets to heirs by using either form (grantor or non-grantor) of a lead trust:

  1. The taxable value of the assets will be reduced by the present value of the income steam the trust will deliver to your organization.

  2. The assets value will be fixed, for gift tax purposes, at the time the donor establishes the trust – any subsequent increase in the value of the assets will pass to the remainder beneficiaries free of estate and gift tax.

  • The donor’s family can often receive more from an estate plan containing a family lead trust than they could from an outright bequest from the donor.  In some cases, the income term can be set long enough and the payout rate set high enough to “zero-out” gift tax.

  • Because the appreciation in value of the lead trust assets is not subject to estate and gift tax, the lead trust is an attractive gift vehicle for appreciating assets.

  • Lead trusts also appeal to owners of assets they wish to pass intact to the next generation, such as a family vacation home.  The home can be placed in the lead trust along with cash or income-producing assets to insure the payments to your organization.

Charitable Remainder Unitrusts

  • The charitable trust pays its beneficiaries a fixed percentage of the value of the principal, as revalued annually.  Payments can be made for the beneficiaries’ lifetimes, for a term of up to 20 years, or for a combination of both.

  • The unitrust payment rate cannot be less than 5% and the charitable remainder must be at least 10%, of the value contributed or the trust will not qualify for income and tax benefits.

  • The donor’s charitable deduction is based on the market value of the assets contributed minus the present value of the income interest retained.  No upfront capital gains tax is applied to appreciated property contributed to a unitrust.

  • The Unitrust is the most flexible life income gift available, and can help donors meet a variety of financial goals for themselves and their families.

  • There are a number of tax benefits.  The donor receives an income tax charitable deduction for a portion of the value of assets transferred to the trust.  Because the Unitrust is tax-exempt, it pays no tax on trust income or realized capital gains.  Lastly, the transfer of assets to the trust will remove those assets from the donor’s taxable estate.

  • The charitable deduction is a function of three factors:  the selected payout rate; the beneficiaries’ life expectancies; and the number of beneficiaries.  The higher the payout rate, the lower the deduction.  The fewer income beneficiaries, the greater the deduction.

  • Because the Unitrust payment is linked to the value of the trust each year, given reasonable investment guidelines and performance, beneficiaries can expect to receive a share in the value of a trust that is gradually growing over time.