A charitable lead trust can be used to transfer assets to children or others at a significantly reduced tax liability. The trust makes a fixed payment to Duke for a specified term, measured either by someone's life or a selected number of years. After the trust term ends, the assets of the trust are either returned to you or passed on to children or other loved ones. If the assets are to be returned to you, you receive an income tax deduction when the trust is created. If the assets are passed on to heirs, applicable estate or gift taxes on the value of the gift are reduced or completely eliminated. The tax savings from a charitable lead trust may allow you to provide significant support for Duke at little or no cost to heirs in terms of ultimate inheritance.
A charitable lead trust may provide either a fixed “annuity” payment or a variable “unitrust” payment to Duke. Low interest rates make the annuity payment option attractive for donors as more assets may be passed on to heirs with reduced or eliminated transfer tax liability.
A charitable lead trust can be a powerful tool in gift and estate tax planning, but the technical complexities require careful consideration. Duke's Office of Gift Planning is glad to work with you and your financial advisors to see if a charitable lead trust is the right plan for you.
Example: Mr. Black puts $1,000,000 in a twenty-year charitable lead trust to benefit Duke. The trust agreement stipulates that Duke is to receive a $50,000 distribution from the trust annually for the purposes spelled out in the trust agreement. At the end of the twenty-year term, Mr. Black’s son, Jack, is to receive the trust principal.
For gift tax purposes, only the present value of the remainder interest (what the IRS estimates the value of the trust principal will be at the end of the trust period) is subject to tax. In this case, Treasury tables project the value of the remainder to be about $182,430. The trust principal, however, actually grows to about $1,367,850 (assuming a 6% annual return), and this is what Jack receives. The difference between the value of the remainder interest under the Treasury tables and the actual trust value at the end of the trust term (about $1,185,420) passes to Jack free of transfer taxes. Mr. Black’s tax liability is based only on the present value of the remainder interest ($182,430), and even this could be offset by Mr. Black’s available estate and gift tax unified credit.
Use our gift planning calculator to estimate the payout and deduction amount for charitable lead unitrusts and charitable lead annuity trusts.