A charitable lead trust is a powerful tool in gift and estate tax planning. Through it, you can transfer assets to loved ones at a significantly reduced tax liability and at the same time, provide a major support for a charity (or charities) of your choice. There is little or no cost to heirs in terms of ultimate inheritance.
The charitable lead trust is the opposite of the better-known charitable remainder trust – in which you receive income for a specified term or for life and any remaining assets go to a named charity. The charitable lead trust is called a lead trust because the charities you designate are entitled to the first (lead) interest in the trust asset. Other beneficiaries receive the remainder (or second-in-line) interest.
Let’s examine how it works. You contribute cash, securities, or other properties to a trust that is set up by your estate planning attorney. The trust makes fixed or variable annual payments to your designated charities for a specified term of years. When the trust ends, the remaining principal goes to your heirs. As a result:
- You qualify for a gift tax deduction for the current value of the payments to the charity.
- You can set up annual payments and terms to reduce or even eliminate the transfer taxes that are paid when the principal reverts to your heirs.
- All appreciation of the trust goes tax-free to your heirs.
- You can use your available estate tax credit to further reduce eventual transfer taxes.
Choose from two types of charitable lead trusts.
In a charitable lead annuity trust, you determine a fixed annual gift for the charities you name. In the charitable lead unitrust, your designated charity or charities will receive a percentage of the trust’s value each year. The benefits will fluctuate depending on the truth’s investment returns or losses.
As interest rates continue to remain low, charitable lead annuity trusts are getting a closer look right now. The lower the interest rate used for the calculation, the higher the deduction will be. The relevant interest rate is 120 percent of the federal midterm rate (also called the 7520 rate), announced each month by the Internal Revenue Service.
Generally, assets transferred to a charitable lead trust are not included in your estate. As a result, a charitable lead trust is an excellent way to transfer assets that are anticipated to grow substantially in value after the trust is created. Since the federal estate tax captures a s much as 45 percent of transfers over $2 million, charitable lead trusts are an ideal way to keep more of what you’ve amassed.
Before you set up a charitable lead trust, you should have accumulated significant assets — $1 million is the recommended minimum. Keep in mind that charitable lead trusts work best with low-basis assets; increases in value after the charitable lead trust is created will not be included in your estate. And, ultimately, the investments should outperform the 7520 rate, which necessitates solid investment management.
BeamaLife possesses the knowledge and expertise to successfully manage charitable lead trusts. We’ll be happy to sit down and speak to you about how to support your favorite charities, preserve intergenerational wealth, and significantly reduce your taxes. Call a BeamaLife specialist today at (877) 972-3262 to speak or complete short form now.