Is your church in a capital campaign? Or, 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 question and you want 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 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 what you place in 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 to family significantly. Estate tax savings result from the removal of the asset, any subsequent appreciation and the future income it generates from your estate.
Example: Sam and Betty Smith set up a 5-year 8% CLAT funded with $50,000 of stock. The $4,000 per year income stream (8% x $50,000 gifted to the trust) will be distributed to the Smiths’ church to fund their capital campaign pledge. Over the 5-year term their church will receive a total of $20,000. Assuming the trust assets earn an average annual return of 6.7%, there will be almost $44,000 left to pass to their children at the end of the 5 years and, if the gift tax value of the future gift to their children is only $31,150, $12,850 of that value passes tax-free to the children.
The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.
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