Give An Income Stream

By: Laurie Valentine-COO & Trust Counsel

Is your church in a building program? Would you like to fund your annual giving for missions, childcare ministries or other charitable causes for the next few years in a new and creative way?

If you answered “yes” to either of those questions and you would like to coordinate your charitable giving with a tax-saving way to transfer assets to your family, a charitable lead annuity trust is a giving vehicle to consider.

A charitable lead annuity trust (“CLAT”) is a giving plan that provides a fixed income stream to one or more charitable causes for a designated period of years. At the end of the trust term the trust remainder can either be returned to you (this is a “grantor lead trust”) or be distributed to your children and/or other family members (a “non-grantor lead trust”).

While a lifetime gift to a “non-grantor” CLAT does not entitle you to a charitable income tax deduction, it does provide a way to pass assets to your children or others at reduced gift and estate tax cost. Gift tax savings come from the fact the tax value of the future gift to your family is the present value of the remainder interest in the trust, not the full value of your gift to the trust. With careful coordination of the fixed amount being paid to the charitable beneficiaries and the trust term you can reduce the present value of the remainder gift significantly. Estate tax savings result from the removal of the asset, any subsequent appreciation and the future income it generates from your estate.

Example: John and Martha Brown set up a 7-year 6% CLAT funded with $100,000 of stock. The $6,000 per year income stream (6% x $100,000 gifted to the trust) will be divided equally between the building program at the Browns’ church, their Baptist college alma mater and international missions. Over the 7-year term the charities will receive a total of $42,000 ($14,000 to each). Assuming the trust assets earn an average annual return of 6.5%, there will be approximately $104,000 left to pass to their children at the end of the 7 years and, if the gift tax value of the future gift to their children is only $60,000, $44,000 of that value passes tax-free to the children.