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Charitable Lead Trust

When people think about providing an inheritance to children and making a significant charitable gift through their estates, a vehicle known as the "charitable lead trust" is an excellent way to accomplish both objectives.

A charitable lead trust is a trust that the estate owner establishes either during life (an inter vivos trust) or at death (a testamentary trust). The income from the trust flows to a charitable organization, like Kingsbury Country Day School, for a stated number of years. After that period, the assets inside the trust are then distributed. The fact that the assets will one day be transferred to another person means that this trust has one further distinction: it is a "nongrantor" trust, as opposed to a grantor trust. "Nongrantor" means the trust assets are not owned by the person who established the trust, and the assets are not going to be returned to him or her someday. (A "grantor" trust is one in which the donor controls the assets, deciding where they will eventually be distributed. As a result, the donor is subject to tax on the assets.)

The Tax Benefits

Of all the charitable vehicles available to donors, the charitable lead trust is among the most complex. A nongrantor lead trust does offer the advantage of providing excellent tax benefits to the estate owner.

Example

Robert transfers $1 million to the trust. Robert does not receive an income tax deduction. And, Kingsbury Country Day School receives an income for 20 years. That income is either a fixed dollar amount or a percentage of the trust value as it is determined each year. For this example, Kingsbury is to receive $50,000 each year. This means that we will receive $1 million over a 20-year period, a wonderful gift for Kingsbury. At the end of that time, the assets in the trust, which may or may not have grown in value, are then distributed to a child or even a grandchild with extra planning. This type of gift is often difficult as the donor receives no income tax deduction. This fact makes it difficult for many people, including attorneys, to understand the benefit to the donor. In fact, the donor may have to pay a gift tax for the privilege of establishing a charitable lead trust. His heirs, however, receive the benefit.


Note: The information on this site is not intended as legal, tax, or investment advice. For such advice, please consult an attorney, tax professional, or investment professional.