Charitable Lead Trust
Summary of Gift Plan
The charitable lead trust is the reverse of the charitable remainder trust. The lead trust pays either an annuity or a unitrust amount to one or more charities during the trust term and the remainder passes to the donor or a named beneficiary. Lead trusts can be set up during life (either as grantor or nongrantor trusts) or at death.
Income Tax Deduction
The present value of income interest is deductible, if the donor is considered the owner of the trust under grantor trust rules, having retained reversionary interest or certain other powers. The deduction is based on the length of the trust term or age of measuring life, §7520 rate and annual payments, which can be an annuity or unitrust amount.
Capital Gains Consequences
The trustee takes the donor's basis, and the trust is taxable on net gains realized, unless the trust is structured as a grantor trust, in which case the donor is taxed. A testamentary lead trust receives a stepped-up basis.
Federal Taxation
Trust income of a grantor lead trust is taxed to the donor; at death, the trust becomes subject to tax as a complex trust. Nongrantor trusts, including testamentary trusts, are taxed as complex trusts but are allowed deductions under Code §642(c) for amounts paid to charity.
Transfer Taxes
A gift tax charitable deduction enables donors to transfer assets to family members at reduced gift tax or generation-skipping transfer (GST) tax. Testamentary lead trusts generate estate tax charitable deductions. A lead unitrust should be employed if the transfer is subject to GST tax.
Tax Returns
Donors must file gift tax returns for lifetime trusts. Trustees file Forms 1041, 1041-A (in general) and Form 5227 annually. Form 4720 must be filed if the trust owes excise tax.
Best Funding Assets
Appreciated property may be less suitable for lifetime lead trusts, if sale and reinvestment of assets by the trustee is anticipated, because trusts are not tax-exempt. Transfers of income-producing assets may be more tax efficient. Testamentary lead trusts receive a step-up in basis.
Special Considerations
Lead trusts help donors who wish to stretch the protection of the gift or estate tax credits, or the exemption for generation skipping transfer tax. Intentionally defective grantor trusts can provide donors with both transfer tax and income tax charitable deductions.
The charitable lead trust is the reverse of the charitable remainder trust. The lead trust pays either an annuity or a unitrust amount to one or more charities during the trust term and the remainder passes to the donor or a named beneficiary. Lead trusts can be set up during life (either as grantor or nongrantor trusts) or at death.
Income Tax Deduction
The present value of income interest is deductible, if the donor is considered the owner of the trust under grantor trust rules, having retained reversionary interest or certain other powers. The deduction is based on the length of the trust term or age of measuring life, §7520 rate and annual payments, which can be an annuity or unitrust amount.
Capital Gains Consequences
The trustee takes the donor's basis, and the trust is taxable on net gains realized, unless the trust is structured as a grantor trust, in which case the donor is taxed. A testamentary lead trust receives a stepped-up basis.
Federal Taxation
Trust income of a grantor lead trust is taxed to the donor; at death, the trust becomes subject to tax as a complex trust. Nongrantor trusts, including testamentary trusts, are taxed as complex trusts but are allowed deductions under Code §642(c) for amounts paid to charity.
Transfer Taxes
A gift tax charitable deduction enables donors to transfer assets to family members at reduced gift tax or generation-skipping transfer (GST) tax. Testamentary lead trusts generate estate tax charitable deductions. A lead unitrust should be employed if the transfer is subject to GST tax.
Tax Returns
Donors must file gift tax returns for lifetime trusts. Trustees file Forms 1041, 1041-A (in general) and Form 5227 annually. Form 4720 must be filed if the trust owes excise tax.
Best Funding Assets
Appreciated property may be less suitable for lifetime lead trusts, if sale and reinvestment of assets by the trustee is anticipated, because trusts are not tax-exempt. Transfers of income-producing assets may be more tax efficient. Testamentary lead trusts receive a step-up in basis.
Special Considerations
Lead trusts help donors who wish to stretch the protection of the gift or estate tax credits, or the exemption for generation skipping transfer tax. Intentionally defective grantor trusts can provide donors with both transfer tax and income tax charitable deductions.
