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Planned Giving
Gifts of Stock | Charitable Bequest | Charitable Remainder Trust | Charitable Lead Trust | Gifts of Real Estate Property passing from parents to children can be taxed up to 55 percent. That means your children may receive only $450,000 of each $1,000,000 in your estate. If you face this problem, you should know about a unique giving arrangement that enables you to minimize or even eliminate gift and estate taxes while making a gift for the benefit of the Red Feather Development Group. It's called the charitable lead trust. Under this plan, you irrevocably transfer assets (cash, publicly-traded securities, closely-held stock and real estate are all acceptable) to a trustee and provide that this income be paid to Red Feather, either for a certain number of years or until the end of your life or another.s. At the end of the trust term, the principal is distributed to your children, grandchildren or other heirs at greatly reduced gift and estate tax rates. Sometimes the principal escapes taxation altogether, since only the present value of the remainder interest (the amount remaining for heirs) will be subject to tax. Example: Joseph Grimaldi funds a lead trust with $1,000,000 and stipulates that Red Feather is to receive $75,000 per year for 15 years, after which the remaining principal will be distributed to his three children. He will report a gift tax charitable deduction of $660,00, leaving just $339,100 subject to gift tax. If he had simply given the $1,000,000 to his children, the entire amount would have been taxable.Because Mr. Grimaldi established the trust during his lifetime, he receives a gift-tax deduction. If the trust were set up under his will to be effective at his death, his estate would receive an estate-tax deduction. Does a lead trust save income taxes too? Some charitable lead trusts are designed so that the remaining principal is returned to the donor, or grantor, rather than distributed to heirs. In those cases the donor receives an income tax deduction for the present value of the payments that will be made to charity. However, each year the donor is taxed on those payments, even though the charity receives them. This would normally be advantageous only if the donor's tax bracket is significantly higher when the deduction is allowed than when the payments are taxed. This flyer focuses on the more common use of lead trusts, which is to transfer wealth to the next generation while reducing transfer taxes and making a charitable gift. The creator of such a trust does not receive an income tax deduction and is not taxed on the trust income. How are the payments determined? The income payment from a charitable lead trust may be set in either of two ways, as agreed upon by the donor and Red Feather. A charitable lead annuity trust pays Red Feather at fixed dollar amount (in the example above, $75,000 per year). Any growth in the trust principal is retained for distribution to heirs. A charitable lead unitrust, on the other hand, pays a fixed percentage of the trust balance as revalued at the beginning of each year, so that any growth in principal will also result in larger payments to Red Feather. In either case, capital gain in the trust principal is not subject to gift and estate tax when the property is distributed to heirs. Suppose a lead trust is funded with $1,000,000, of which $700,000 is deductible and $300,000 is taxable. If the trust grows to $2,000,000 by the time it terminates, still only $300,000 will be taxable; the other $1,700,000 will pass to the heirs tax-free. (Your heirs will be taxed on the capital gain when they sell the property. If you created the trust during your lifetime, they will take over your basis. If the trust was established under your will, their cost basis will be the value of the property at the time of your death.) When to create the trust A charitable lead trust could be created pursuant to a provision in your will. You would retain control of your property for the duration of your life, and then the trust would be established and continue for a specified number of years. This would be appropriate if your family beneficiaries are still young and you don.t mind delaying distributions to them. If you want the property to pass sooner, and you don.t need the income from all of your assets, you could establish the trust during your lifetime and have the distributions occur at your death or at the end of a certain number of years. Planning your trust for maximum benefit Several factors affect the amount of principal that will pass to your heirs from a lead trust, and how much of it will be sheltered from gift and estate taxes. One is the length of the trust term -- the period during which payments are made to Red Feather. A longer term yields a higher deduction, but also delays the final distribution to heirs. YouUll want to consider the ages of your heirs in setting the trust term. Some people plan for the distributions to occur when children or grandchildren are mature enough to mange assets responsibly. Another factor is the payout rate to the income beneficiary -- Red Feather. A higher payout rate provides more income to Red Feather and yields a larger tax deduction, but it also limits the potential growth of trust principal and leaves relatively less for heirs. The size of your tax deduction is also affected by the IRS discount rate in effect at the time of your gift. All of these variables need to be considered together in order to arrive at the type of trust (fixed dollar payout or fixed percentage), trust term, and payout rate that will best achieve your goals. Red Feather will be pleased to prepare illustration of various configurations and work with you in designing the trust that is right for you. Choosing a trustee As donor, you have the option to name a trust institution or an individual as trustee. If you establish the trust while you are alive, you may serve as trustee, which could be appealing if you want to retain investment control. The Charitable Lead Trust -- It's the gift for the benefit of Red Feather Development Group that can actually increase your legacy to loved ones! This information does not constitute legal or financial advice and should not be relied upon as a substitute for professional advice. Red Feather Development Group encourages you to seek professional legal, estate planning and financial advice before deciding on a course of action.
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