With Federal estate taxes as high as 55%, many taxable estates end up paying more to Uncle Sam than to the designated heirs. Individuals with charitable giving as a high priority may offset this potential tax burden by establishing a Charitable Lead Trust.
A Charitable Lead Trust allows the taxpayer to transfer cash or assets into a trust which pays either a specific dollar amount or a percentage of the value to qualified charities for a designated period. The remainder interest is transferred to non-charitable beneficiaries, such as your children. When the trust is established, only the present value of the deferred gift to the children is subject to gift tax.
For example, assume that a taxpayer intends to give $70,000 annually to one or more charities for the next 10 years. The taxpayer forms a Charitable Lead Trust with $1 million dollars with a 7% guaranteed annuity payout for 10 years. At the end of 10 years, the remaining assets are distributed to the taxpayer¼s children. A $70,000 annuity to charities for 10 years is worth approximately $492,000 (present value). The remainder, $508,000, becomes the tax basis for the $1 million dollar gift to the children.
If however, the taxpayer chose to give $70,000 to charities each year for 10 years and then give the children $1 million dollars without the benefit of a Charitable Lead Trust, taxes would be owed on $1 million dollars, not $508,000.
If it sounds to good to believe, remember most tax saving opportunities come with tradeoffs. The Charitable Lead Trust is best suited for those who plan to give to charities, are willing to part with some assets, and do not nor will not require income from the money/assets used to form the Charitable Lead Trust. Maximizing strategies to save taxes requires full knowledge of your individual circumstances. Before embarking on any tax savings strategy, talk with both your accountant and attorney.
For more information on the Charitable Lead Trust, complete the boomerang card and return it to ReGENERATION Partners or contact Michael Martin, 214.969.7007.
