A Charitable Lead Trust is a planning tool that can be very appealing to the right person. If a person has substantial assets, is interested in charitable giving, desires to make a delayed gift to
noncharitable beneficiaries, and wants to reduce estate taxes, the Lead Trust is ideal. Typically, children or trusts for children are designated as the noncharitable remainder beneficiaries.
Characteristics of a Lead Trust
The charitable beneficiaries enjoy the property first, receiving either a fixed annuity or a variable annuity (unitrust amount) for the trust term. That term may be for a term certain or for the lives of one or more individuals who are living at the time the trust is created.
The remainder is given to the noncharitable (family) beneficiaries upon the termination date of the trust, either outright or in a trust for the beneficiary. If the assets in the Lead Trust appreciate during the lead trust term, the property plus all of the appreciation passes to the family beneficiary at no additional transfer tax cost upon the termination of the trust.
The Trustee may be a family member and may receive compensation for his or her services provided the amount is reasonable and necessary to carry out the exempt purposes of the Trust.
If desirable, either the Trustee or the Grantor may be permitted to substitute the charitable beneficiaries, provided the alternate charity or charities qualifies as a charity under the applicable
sections of the Internal Revenue Code.
Taxation of a Lead Trust
The charity's lead interest in the trust qualifies for either a gift tax charitable deduction or an estate tax charitable deduction, as applicable. The difference between the fair market value of the property given to the Lead Trust and the value of the charitable lead interest (i.e. the remainder interest in the trust) is either a gift subject to gift tax or a bequest subject to estate tax.
If grandchildren or more remote descendants are recipients of the property at the conclusion of the term of the charitable interest, the generation skipping transfer tax (GST tax) may also apply. However, the GST transfer tax exemption is available to offset that tax.
Typically, a Lead Trust is drafted so there will be no income tax deduction at the creation of the trust and no taxation of trust income to the Grantor during the trust term.
Flexibility of a Lead Trust
A Lead Trust is irrevocable. Still, opportunities for flexibility remain. The ability of the Grantor or a Trustee to select the charitable recipients each year is a positive feature. The remainder interest to family can be structured to flow with the overall estate plan of a donor. Our planning attorneys are available to design a planning strategy for your consideration.