Charitable Lead Trusts
When you create a charitable lead trust, the initial or "lead" interest is paid out to Duke annually for either a predetermined number of years or for the duration of your life. Thereafter, the assets of the lead trust are either returned to you or passed on to your children, grandchildren, or other loved ones. If the assets are to be returned to you, you receive an income tax deduction when the trust is created. If the assets are passed on to heirs, applicable estate or gift taxes on the value of the gift are reduced or completely eliminated.
A charitable lead trust can be a powerful tool in gift and estate tax planning, but the technical complexities require careful consideration. Duke's Office of Gift Planning is glad to work with you and your financial advisors to see if a charitable lead trust is the right plan for you.
Example
Mr. Black puts $1,000,000 in a twenty-year charitable lead trust to benefit Duke. The trust agreement stipulates that Duke is to receive $70,000 in income annually for the purposes spelled out in the trust agreement. At the end of the twenty-year term, Mr. Black's son, Jack, is to receive the trust principal.
For gift tax purposes, only the remainder interest (what the IRS estimates the value of the trust principal will be at the end of the trust period) is subject to tax. In this case, Treasury tables project the value of the remainder to be about $222,500. The trust principal, however, actually grows to about $2,597,000 (assuming a 3% annual net return), and this is what Jack receives. The difference between the value of the remainder interest under the Treasury tables and the actual trust value at the end of the trust term (about $2,375,000) passes to Jack, free of transfer taxes. Mr. Black's tax liability is based only on the projected value of the remainder interest ($222,500), and even this could be offset by Mr. Black's available estate and gift tax unified credit.