Charitable Lead Trusts offer a great mechanism for using your accumulated wealth to benefit BOTH your favorite church or qualified charity and your desired family members or heirs. Essentially, the creator of the trust or donor funds the trust with a certain amount of money or assets and the income generated from the assets are paid annually to a designated qualified charity or church for a certain period of time. The donor decides what assets to use to fund the trust. Often assets that are likely to appreciate over time are used to fund the Charitable Lead Trust.

The donor also selects the time period over which the charity shall receive the income generated by the trust assets. At the end of that time period the trust principal can pass back to the donor, the donor’s family members or heirs.

Using IRS tables the qualified charity’s lead interest in the trust will have a certain value and the remainder interest that will pass say to the donor’ s heirs will have a certain value. The idea is that when the remainder of the trust, holding the appreciated assets, passes to the family members that their may also be some estate tax savings on the appreciated value of the assets.

As an example, say Ken creates a charitable lead trust and funds it with $2million dollars. The trust provides for a fixed annual payment of $100,000 to the charity of Ken’s choice (or 5% of the initial $2 million dollar trust value) for 20 years. Assuming, a 2% section 7520 rate (IRS Table), then the charity’s lead interest in the trust is valued at $1,635,140 and the remainder interest that will eventually pass to the family or heirs of Ken is valued at $364,860. The idea is that assuming that the trust assets appreciated over time, then any principal remaining in the trust in excess of the $364,860 will pass to Ken’s family unreduced by any additional estate taxes.

So, as you can see the Charitable Lead Trust is a great way for the charitable minding individual to benefit both their charity and their family.

This information is general in nature and should not be relied upon as legal advice.

Leave a Comment