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You can create a current stream of income for Smith and/or other
charities for a period of years, after which the remaining trust principal passes to the parties
you designate—usually children or grandchildren. Smith benefits immediately through annual
payments from the trust, and trust assets can continue to grow before they pass to the next
generation.
A charitable
lead trust can effectively transfer assets from one generation to another at
significantly reduced gift and estate taxes, preserving more of your assets for the
purposes you choose.
Because an amount has been distributed to charity, the gift
or estate taxes due on the transfer to heirs can be greatly reduced. If such a trust
is created during the donor’s lifetime, gift tax may be due when the trust is
established, depending upon how much income will go to charity. Any appreciation
in the trust passes to heirs with no additional tax due. Assets donated to the trust
may be sold or held intact if they can produce the required income stream. Donors
sometimes use businesses or closely held stock to fund these trusts.
Case Study
Jane and John own a parking garage worth $1 million that their children would like to operate in the future. They fund a charitable lead trust with the property, designating that Smith and their church split 5% of the initial value ($50,000) each year for ten years.
Since the parking garage can easily produce $50,000 in income, the property does not need to be sold for reinvestment. No gift tax was due at the time the trust was created because the future gift to their children fell beneath the $1 million gift tax exemption level.
At the end of 10 years, the charities have each received $250,000, and the property, now worth $1.5
million, passes to their children with no additional tax due.
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