Charitable Lead Trusts
A Single Technique Benefits Your Family and Vanderbilt
If there were a way to 1) Fund a program now, 2) Add money to the endowment for a permanent named fund and 3) Transfer assets to heirs free of estate and gift taxes – all at the same time, would you be interested?
How a charitable lead trust works:
- You sign a trust agreement and transfer money or property to the trust.
- You decide how long the trust will last, for example, five, 10, 15, 20 years or more. During those years, the trust pays annual income to your charity.
- At the end of the period, the trust terminates and distributes the principal and income balance plus any growth on those assets to your non-charitable beneficiaries (children, grandchildren or others). The recipients pay no income, gift or estate tax on the distribution.
- The value of the annual payments to charity provides a charitable deduction. This deduction offsets the taxes imposed on transfers of large amounts of money or property to individuals (gift and estate taxes).
- Or, you can arrange to apply the deduction against your income. You can also choose to have the trust's principal return to you at the end of the term, rather than being distributed to others.
- Bill, (A&S '74) age 62, is actively involved in the business he started years ago. One of his three children, Kathryn, is a Vanderbilt University senior (following in Dad's footsteps).
- With an estate valued at $20 million, Bill imagines a legacy at Vanderbilt, the school his family loves. He also wants to provide his children with security in the future, once they're ready to handle it. Finally, Bill does not wish to pay any unnecessary taxes.
- Bill and his wife, Elizabeth, have tax-effective wills that partially protect their assets from estate taxes. Their combined individual exemptions will shelter $10,680,000 which means that $9,320,000 is exposed at the 45 percent rate which translates into a $4.2 million tax bill.
The Charitable Lead Trust Provides Solutions and Benefits
- Bill places $2 million in a 7.4822% percent charitable lead annuity trust whose income is paid to Vanderbilt ($149,644 annually) for 16 years. His children will receive the lead trust principal after 16 years. (Better yet, the lead trust pours into another trust for their benefit at that time.)
- For gift tax purposes, the IRS treats the lead trust principal as a taxable gift to the children. However, the gift amount is not the $2 million, but rather $0. (The charitable gift tax deduction of $2,000,000 "zeroes out" the $2 million gift.)
- Vanderbilt uses part of the income to pay for current programs. Bill truly enjoys the experience. The rest of the annual income is invested in Vanderbilt's endowment to help endow a chair or other programs.
- After 16 years, the children receive $3,001,851 (the lead trust principal plus growth) free of federal gift and estate tax.
1. This oversimplified example is an illustration only, based on various assumptions for a charitable lead annuity trust established in August 2014. Actual results may vary depending on timing and other factors. Always seek professional advice from your independent advisor before making a gift.
Vanderbilt University's Office of Planned Giving has informed and helpful staff members who can answer all of your questions. Your call is always welcome. Please contact the planned giving office at (615) 343-3113 or email firstname.lastname@example.org.