Charitable Lead Trusts
A charitable lead trust is created by transferring property, such as cash, securities, privately held stock, real estate, and limited partnerships, to a trust. A charitable lead trust can be funded during the donor’s lifetime or through a will. During the term of the trust, which is often a specified number of years, the National Gallery of Art receives either a fixed dollar amount or a fixed percentage of the trust principal, revalued annually. Additional contributions to the trust are permitted. At the end of the trust term, the remaining principal is distributed to beneficiaries—typically children or grandchildren—either outright or in further trust.
With a gift that passes to children or grandchildren, this type of trust can provide substantial gift and estate tax benefits. The transfer allows a charitable gift tax deduction for the present value of the annual payments to the Gallery, thereby reducing the gift tax on the eventual gift beneficiaries. Upon termination of the trust, any appreciation in the value of the trust property passes to beneficiaries free of estate and gift taxes.
If the trust term is long enough and the annual payment to the Gallery is large enough, the tax on the gift to beneficiaries can actually be eliminated. Additionally, because the donor has parted with ownership of the trust property, it is not taxable in the donor’s estate.
Example of a Charitable Lead Trust:
Mrs. Lane, a widow, wants to pay tribute to her late husband’s deep appreciation of the arts with a gift to the National Gallery of Art. She also wants to pass some of her wealth to her grandson.
Upon the recommendation of her financial adviser, Mrs. Lane chooses to create a $3 million charitable lead trust to last the duration of her life, naming the Gallery as beneficiary of an annual payment of 8 percent of the trust’s assets, valued annually, during that term. The Gallery will receive an annual payment amounting to $240,000 in the first year and a variable amount in each additional year of the trust. When the trust terminates at Mrs. Lane’s death, the assets will pass to her grandson.
By establishing a charitable lead trust, Mrs. Lane is able to accomplish many things: she makes a gift to the Gallery in memory of her late husband; she reduces the size of her taxable estate; and she passes on a large gift to her grandson at a reduced taxation level.
We invite you to contact us with questions or comments about planned giving; we would welcome the opportunity to discuss these options further with you. We highly recommend that you also speak to a financial adviser.