In consultation with the Director of Gift Planning at their alma mater, John and Mary decide to set up an 8% annuity lead trust funded with the strip mall, that will pay income to the charity for a period of 10 years. Since the income is from fixed-payment leases, there will be no unrelated business taxable income. While a lead trust is a taxable trust, the payments to charity will be fully deductible under IRC Sec. 642(c) on the trust Form 1041. After 10 years, the property will be transferred to the children.
The results of this transaction are the following:
(1) Charity will receive $80,000 per year for the next 10 years, thus fulfilling John and Mary's giving goal of $800,000 to the capital campaign.
(2) As a result of transferring the property to the trust, John and Mary will receive a current gift tax deduction of over $530,000. Therefore, the net taxable gift that will be reported for gift tax purposes is about $470,000. However, no gift tax is due, since $470,000 is well under their combined lifetime exemption.
(3) Assuming that the property will appreciate by 4% per year, the children will receive the property at the end of the 10-year term, when it will be valued at $1,480,000. The appreciation of $480,000 will be completely free of additional gift and estate taxes.
As you can see, the lead trust is an excellent vehicle for fulfilling John and Mary's giving goal for their alma mater and then passing an inheritance on to their children.
