Charitable Lead Trusts: Case Study
The following is an illustration of how this type of donation works.
George is 55 years old and married with three children. He has a portfolio worth $800,000 and wants to support a qualified charitable organization today. Following his advisor’s recommendation, George creates a 20-year charitable lead annuity trust with his portfolio.
How the Trust Is Set Up
Because George wanted to witness the results of his generosity, he arranged the trust so that it provided payments to the organization during his lifetime instead of through his estate. George’s trust pays $48,000 (6 percent of the initial fair market value) to the organization each year for 20 years, which will total $864,000. After that, the balance in the trust goes to his children.
Major Tax Benefits
His gift tax deduction is $714,1201 against the $800,000 of assets. Therefore only the difference ($85,880) is subject to gift tax, which is offset against his $5 million lifetime gift tax exclusion in 2011-2012. After that, the remaining trust assets and all of their growth will pass to his family at zero additional cost in gift and estate taxes.
George’s children will receive a sizable inheritance, albeit not for 20 years. And after 20 years in the trust, the portfolio should be worth close to $800,000 if the underlying trust assets experience just average market performance (in this case, 6 percent growth). This will save the family unnecessary estate taxes by moving $800,000 from his estate. It also will still provide for George’s philanthropic interests in a very tax-efficient manner.
1Assuming annual payments and a 3 percent charitable midterm federal rate.