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Charitable Lead Trust
(Complete gift description)

A lead trust holds your gift of appreciating assets, pays income to University of Virginia School of Law for a period of years, and then returns the remaining principal. A lead trust can provide significant estate and financial planning benefits.

If the trust returns its principal balance to you when it terminates, it is called a grantor lead trust. Grantor lead trusts are discussed below.

But many donors use this gift plan to pass assets to their children or other heirs. They choose a lead trust that pays its principal balance not to themselves but to other beneficiaries, and this version is called a non-grantor lead trust.

Will your children face a tax burden when you die?

The non-grantor lead trust reduces the cost of passing property to your heirs in two ways. First, the estate- and gift-tax value of assets you place in your lead trust will be reduced by the present value of the income that the trust will pay to the Law School. The longer the lead trust pays the Law School income, and the more income it pays us, the larger your estate and gift tax deduction will be.

Second, the taxable value of the lead trust assets is fixed as of the time you establish the trust – any subsequent increase in the value of the assets will pass to your heirs outside your estate and thus free of estate and gift tax.

This combined reduction in the taxable value of the lead trust assets means that your family can often receive more from an estate plan containing a non-grantor lead trust than they could from an outright bequest from you.

The non-grantor lead trust also offers you these additional features:

Are you concerned about high income tax liability?

You may be in a high earnings period where redirecting income to charity makes sense. Alternately, this may be a very high tax year; you want a deduction but don't want to part permanently with a valuable asset.

Examine a grantor lead trust. This creative plan will hold your gift of appreciating assets, pay income to the Law School for a period, then return the assets to you. You will receive an upfront income tax charitable deduction for creating the grantor lead trust – the present value of the total income payments to the Law School (you receive no income tax deduction when you establish a non-grantor lead trust).

The trust's annual earnings (minus the distributions to the Law School) will be taxable to you. However, if the amount of our income and the length of time we receive it are adjusted sufficiently, the upfront deduction can offset this subsequent tax.

At the end of the grantor lead trust's term, the assets return to you.

How is the amount paid to the Law School determined?

A lead trust can pay us a fixed amount of income every year (a charitable lead annuity trust), or pay us a fixed percentage of the value of trust principal, as revalued annually (a charitable lead unitrust).

The choice of format will have some effect on your tax savings. We can help you and your advisors model the different options as you consider your gift plan.

How do I create a charitable lead trust?

Setting up a charitable lead trust is not particularly difficult, but you should be advised by an attorney or other advisor with expertise in the area of charitable trusts and estate planning. We can provide income and tax projections for your gift an initial draft of the lead trust agreement for review by you and your advisors.

Once the final agreement is signed, you can fund your lead trust by transferring assets to your trustee.

Tax considerations
The tax benefits of a charitable lead trust, including possible estate tax, gift tax, generation-skipping transfer tax, and income tax benefits, will vary depending on your financial situation, whom you designate as your remainder beneficiaries, and how your trust is structured.

We will be pleased to talk with you in more detail about the relevant considerations and to provide sample calculations to give you a sense of how a lead trust can meet your goals, but only your estate planning or tax advisor will be able to help you understand exactly how a charitable lead trust may help you achieve your particular goals.

Planning Points


 

For more information

Email us, or call us at 877-307-0158 (toll free) or 434-924-4514 (direct) so that we may answer your questions and help you through the process.


The materials provided in this website and the examples contained herein are for illustration purposes only and are not intended as legal or tax advice. We encourage you to consult your own legal and tax advisor.