A charitable lead trust can be an extremely attractive vehicle to provide for a partner, children or other loved ones at a specified time in the future. You contribute assets to the trust, directing that the trust will pay an income to a selected charity for a period of years. At the end of that period, the remainder will be paid to your chosen individual beneficiaries.
Creating the trust during your lifetime
For charitable lead trusts created during your lifetime to ultimately benefit someone other than yourself (i.e., a partner or child), the future transfer of the remainder takes place wholly outside of your estate and therefore is not subject to estate tax or will contest, factors that may be desirable for an unmarried couple. There may be gift tax due at the time the lead trust is created, based on the present value of what your ultimate beneficiary will receive. However, particularly in low interest rate environments, it is often possible to reduce that present value to zero or nearly zero, thereby allowing assets to be transferred at little or no tax cost.
Example: Alice and Betsy have been partners for more than 15 years. Alice has been the primary breadwinner in the household, having created and sold a business that netted a large profit. Betsy also works outside their home and plans to retire in 10 years. Alice wants to maximize the gifts that she can give Betsy, while also creating a named professorship at Duke to honor her parents. Alice chooses to fund a charitable lead trust with $2 million. This 10 year trust will ultimately distribute a gift to Betsy at the time of her planned retirement. In the meantime, based on sample rates, the trust could pay an annual stream of almost $235,000 to Duke for 10 years—a total gift of over $2 million for the professorship—and still be able to potentially pay Betsy over $900,000 in 10 years. That money will go to Betsy without gift or estate tax and cannot be subject to any will challenge by Alice’s family.
Creating the trust through your estate plan
Alternatively, a charitable lead trust created upon your death through an estate plan can be used as a marital deduction trust substitute. For estate tax purposes, the present value of the future remainder payable to your individual beneficiaries is included in your estate, but the value of the charity’s income stream qualifies for the estate tax charitable deduction. This may allow significant assets to be transferred to your partner or children while reducing your estate tax liability. Note, however, using a charitable lead trust is only appropriate when your individual beneficiaries will not have an immediate need for these assets after your death. You will also want to consider the age of your beneficiary when determining the likelihood that he or she will survive the designated period of years to receive the remainder interest.
Example: Aunt Adelaide has always had a close relationship with her nephew, Bradley. She currently helps Bradley with big purchases, though she values his initiative and wants to encourage self-sufficiency. For that reason, she would like to provide for a gift after her death that will be paid later in Bradley’s life. Her will creates a charitable lead trust that will make payments to Duke to fund a capital project in Athletics for 15 years. After that, the remaining assets in the charitable lead trust will go to Bradley. Aunt Adelaide’s taxable estate will not include the amount transferred into the charitable lead trust upon her death, regardless of the amount that Bradley actually receives 15 years later.
To learn more about charitable lead trusts at Duke, contact a member of our staff.