Charitable Lead Trust – The Wealth Transfer Engine

What is a charitable lead trust?

If you have a large estate and are looking for ways to pass more on to your heirs, a Charitable Lead Trust may be an excellent plan for you. A Charitable Lead Trust is a gift plan that allows you to transfer assets to future generations at a significantly reduced gift or estate tax cost, while providing a stream of income to Oxford University for a term of years. The technical name for this type of Charitable Lead Trust is a “Non-Grantor Charitable Lead Annuity Trust.” It is called a “non-grantor” trust because the assets eventually revert to non-charitable beneficiaries other than the grantor. It is called a “Lead” trust because it leads with a stream of income to charity before the assets revert to the remainder beneficiaries. It is called an “Annuity” trust because it provides fixed annual payments to charity during the term of the trust.

What are the advantages?

The main advantage of a Charitable Lead Annuity Trust (CLAT) is that the term and payout rate of the trust can be adjusted to reduce or even “zero out” the gift tax you owe on the asset transfer to your heirs. In other words, it is possible to make a large asset transfer to your heirs tax-free, while also benefiting Oxford University. In addition, any appreciation that takes place inside of the trust goes tax-free to your heirs. This makes a Charitable Lead Trust a powerful wealth transfer tool.


Example

Assume that you use appreciated property with an average cost basis of 50% to fund a $2 million Charitable Lead Annuity Trust (CLAT) that makes a 6% annuity payment ($120,000) to Oxford University for 15 years, after which the trust principal reverts to your grandchildren in a generation skipping transfer. Assume also that your gross estate is currently $10 million, you have made no previous taxable transfers, you are in the 35% federal income tax bracket, and the state income tax for trusts is 2.5%. Assume further that your average total investment return is 7% over the 15 year term. A 2.4% IRS Discount Rate is used to calculate the value of the remainder interest to your heirs.

CLAT

Without Trust

Gross principal

$2,000,000

$2,000,000

Net principal placed in plan

$2,000,000

$2,000,000

Benefit to family

$2,358,758

$3,093,554

Benefit to Oxford University

$1,800,000

0

Total taxes

$143,822

$2,152,698


PLEASE NOTE: This example is for illustrative purposes only and is not intended as legal or tax advice. Consult your legal and tax advisors prior to making any material decisions based on this data.


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