Charitable Lead Trust
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.
How It Works
A charitable lead trust is the opposite of a life income gift arrangement: the donor places assets in trust and the trust generates annual income for charity over a period of years. After a specified length of time, the assets come out of the trust and become the property of the donor's heirs.
The donor can name multiple charitable beneficiaries to receive payouts from the trust during its term. The donor can also use non-cash income-producing assets to fund the trust. Commercial real estate is a good example of a non-cash asset that can be passed to younger family members through a charitable lead trust.
Tax Deductibility
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.
When the heirs receive the assets at the end of the trust term, there will be no inheritance taxes applied to that transfer.
Get Advice
Charitable lead trusts are complex and require advice from experienced attorneys. In our experience it is inadvisable for donors to consider this type of trust for assets totaling less than $1 million.
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 percent 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.
