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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 Sam Houston State 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 Sam Houston State 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.
Why lead trusts are beneficial now
This is the best time in decades to establish a Charitable Lead Annuity Trust. Why? Because the Section 7520 Rate—the monthly rate that the IRS uses to calculate the remainder interest in charitable trusts—has dropped to historic lows (5.4% for December, 2005). The lower the rate, the larger the gift tax benefit in a Lead Trust. This allows you to more easily zero out the gift tax owed on transfer to your heirs.
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 SHSU for 20 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 5% over the 20 year term. A 5.6 IRS Discount Rate is used to calculate the value of the remainder
interest to your heirs.
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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 |
$3,512,700 |
$2,752,867 |
Benefit
to Sam Houston State University |
$2,400,000 |
0 |
Total
taxes |
$317,779 |
$5,770,711 |
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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E-mail us, complete the Personal Illustration form, or call us at (936) 294-3625 so that we can assist you.
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