Charitable Lead Trust

During the term of years that a Lead Trust is in force, ministry receives the income. At the end of the trust term, the ministry returns the trust assets to the donor or to the donor’s family. The Lead Trust is a charitable-giving tool that benefits ministry immediately and provides excellent income tax management or estate-planning options for the donor.

The donor benefits from the satisfaction of helping ministry and receives either an income tax deduction or a gift tax deduction:

• The larger the percentage payout or annuity payout, the larger the deduction.
• The longer the term of trust, the larger the deduction.

Two types of Lead Trusts should be considered: A Grantor Lead Trust provides an income tax deduction, while a Family Lead Trust provides a gift tax deduction.

Grantor Lead Trust

A large up-front charitable deduction is received in the first year of the Grantor Lead Trust, equal to the present value of all of the income that will be distributed throughout the life of the trust. In the first year, your deduction is usable up to 30% of your Adjusted Gross Income (AGI), and unused portions can be carried forward into future years. It is customary to establish a Lead Trust for five to seven years, though it can be set up for 30 years or longer. A common Lead Trust portfolio often uses municipal bonds. This makes the trust income tax exempt and helps make your large first-year deduction even more valuable.

Gift Idea: If you work in a profession that pays significant annual performance bonuses, the large first-year charitable deduction can help you offset much of the income tax exposure on such bonuses and also help you fulfill multi-year ministry support commitments.

Family Lead Trust

Full charitable deductions (no 30% or 50% AGI limits) may be claimed inside the trust, rather than by the donor. This offsets any of your trust earnings income tax exposure. You also receive a significant gift tax deduction, calculated as the present value of the payments made to ministry during the life of the trust. When the trust is dissolved, your family receives the assets, and they do not have to recognize any appreciation of the assets earned during the life of the trust. The assets should be carefully selected to avoid much selling during the trust term because capital gains taxes will have to be paid. Thus, funding the trust with low-basis assets, and leaving them there to pass on to family, is the best practice.

During periods of historically low interest rates, the amount of the gift tax deduction is magnified. For example, when applicable federal rates are in the 3% range, a $1 million asset, paying 8% for seven years, will generate a deduction of more than $504,000. By using part of your lifetime exemption equivalent, and with a 3% growth rate, in 15 years the asset will grow to more than $1.2 million and pass to family tax-free.

The new tax law is being phased in over the next 7 years. Our advisors suggest that it continues to be a good idea to utilize Family Lead Trust strategies during these years.

For further information and assistance, please contact Steve Hoffman of our Gift and Estate Design services.

Phone: 1-800-436-4488
Email: shoffman@gemission.com

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