A charitable lead annuity trust provides high-net-worth individuals with a structure for donating to charity and giving a gift to another person or entity. Importantly, the gift recipient does not need to be a charitable organization. Thus, you can donate to your favorite hospital foundation and leave a gift to your nephew using a single trust.
How a Charitable Lead Trust Works
Breaking down the name “charitable lead annuity trust” explains exactly how it works. Each component is as follows:
The trust names a charity as its beneficiary. To receive a deduction for a charitable donation, the charity must meet the IRS’s definition of a qualified charitable organization.
Charitable trusts usually take two forms. In a remainder trust, the non-charity entity is the first beneficiary, and the charity gets the remainder after a triggering event. For example, you might be the beneficiary of the trust until you die, then a charity receives whatever remains in the trust at your death.
In a lead trust, the charity is the first beneficiary, and the non-charity entity gets the remainder upon the triggering event. Thus, the trust might support a school until your grandchild turns 18, then your grandchild might receive whatever is left.
Trusts are usually either annuity trusts or unitrusts. An annuity trust pays a fixed amount every year, although the fixed amount can vary yearly or remain the same.
A unitrust pays a variable amount. For example, the beneficiary might receive the annual interest income on the trust assets. The disbursements would vary from year to year with interest rates.
A trust is a legal entity. A trustee holds legal ownership of the trust assets. A beneficiary holds equitable ownership of the trust assets. The trustee distributes property from the trust to the beneficiary as instructed in the trust document. The trustee has a fiduciary duty to follow the instructions and preserve the trust assets.
When to Use a Charitable Lead Annuity Trust for Estate Planning
A charitable lead annuity trust gives you control over how your property gets distributed after your death. It can also reduce your tax burden by giving you a charitable donation deduction on your income taxes and reducing the size of your estate subject to estate taxes.
Some reasons to use a charitable lead annuity trust include the following:
You Want to Donate to Charity
You will use a charitable lead annuity trust when you want to donate to charity. Your donation supports the charity through annuities for at least two years. You must intend to make a long-term commitment to supporting the charity.
You Want to Give a Gift to Someone Besides the Charity
A lead trust, by definition, leaves a remainder. This remainder goes to the non-charity entity designated in your trust document.
Many people send the remainder to a child who is a minor at the time the trust is created. The charity benefits from the trust property until the child reaches the age of majority, then the child becomes the beneficiary. This ensures the trust property never sits idle.
You Received Windfall Income
Your charitable donation deduction happens in the year you create the trust. If you receive unusually high earnings or a windfall in one year, you can create a charitable lead trust to earn a deduction that reduces your tax burden for that year.
You Expect Interest Rates to Go Up
When you take your deduction, you calculate it based on the present value of the charitable annuity. The present value decreases as interest rates go up. Therefore, the best year to create a charitable lead annuity trust is one with low interest rates.
Creating a Charitable Lead Annuity Trust
To discuss how a charitable lead annuity trust may fit into your estate plan, contact Merlino & Gonzalez, a real estate and elder planning firm in Staten Island, NY.