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Thursday, May 2, 2024
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Case Studies |
The Double Benefits of the EZ Lead Trust
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Case:
Jennifer Fields, a widow, is 75 years of age and has income of approximately $100,000 per year. Jennifer is very generous and has consistently given $24,000 to her favorite charities over the past 10 years. Her current estate is right at $3,000,000, and she recently attended a seminar on the use of charitable lead trusts in one's financial and charitable planning. She thought that perhaps she could fund a lead trust with a portion of her estate and take advantage of the current low Applicable Federal Rates. These low rates would enable her to transfer more of her estate via the lead trust to her children, with reduced gift tax consequences. She would like to continue to give her targeted amount of $24,000 per year, but she wondered if the lead trust would be the best vehicle to fulfill her annual giving objectives.
Question:
If she chooses to fund a lead trust with a portion of her estate, what amount should she choose to fund the trust? She was told in the seminar that a lead trust could be set up for a term of years or a lifetime. Could a trust be set up for a combination of a term and a lifetime?
Solution:
Jennifer posed these questios to Adam Warner, Director of Major Gifts at one of her favorite charities. Adam stated that in order to receive a double benefit for both income and estate tax purposes, Jennifer may consider setting up a charitable lead trust for the lesser of a term or her lifetime. In looking at Treasury tables, Adam stated that her life expectancy is about 12 years. Therefore, Jennifer could create a trust to last for the lesser of 12 years or her lifetime. Adam explained that such a trust uses the actuarial formulas now required by Treasury for agreements such as grantor-retained annuity trusts. However, the actuarial method is sound and may also be used for a charitable lead trust.
Why should Jennifer create such a plan? She is already giving $24,000 per year. By setting aside 10% of her estate, or $300,000 in assets, and creating a lead trust that pays 8%, or $24,000, per year, she is removing this income from her personal tax return and making the same gifts that she has made in the past. In addition, if she wishes to retain the ability to designate the gifts year by year, Jennifer may select a friendly trustee and give that trustee the right to select the charities. With Jennifer's advice, the trustee may then select the charities to receive the $24,000.
If Jennifer survives past her normal life expectancy of 12 years, the inheritance for the family will be transferred at that time without further taxation. Based on an Applicable Federate Rate of 5.4%, the $300,000 trust will generate a charitable gift tax deduction of $152,800. The balance of $147,200 is a taxable gift and requires the filing of a gift tax return and use of a portion of her lifetime exemption.
Since the lead trust assets which will be eventually transferred to her children at the trust's termination may equal $300,000 plus growth, this is the equivalent of receiving a free additional exemption of $152,800 plus growth. As explained to Jennifer, it's as though she receives a double benefit from gifts that are already being made. This trust will invariably provide more to the children and, will obviously be quite "EZ" to create.
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