Planning for Grandchildren with Lead Trusts
Generation-skipping transfer tax (GSTT) is particularly significant for charitable lead trusts. Since the goal of many grandparents is to allow grandchildren to fully mature before receiving a significant inheritance, the opportunity to leverage an inheritance through a lead trust for grandchildren is quite attractive. It is possible to pass two to seven times the exemption amount to grandchildren with a testamentary lead trust and still have zero GSTT.
Applicable Fraction for Annuity Lead Trusts
With an annuity lead trust, the applicable fraction is not calculated until the termination of the trust. The applicable fraction equals the exemption with growth for the trust term calculated at the applicable federal rate as of trust inception, divided by the value of the trust at termination. Sec. 2642(e)(2).
The applicable formula is:
allocated GSTT exemption * ((1+AFR)^selected term)
trust corpus
This method subjects the trust to considerable uncertainty. While it is possible to know the value of the exemption with projected growth, the actual trust corpus will not be known with certainty until the date of distribution. It has been suggested that it could be possible to transfer to family the amount equal to the adjusted exemption and transfer the balance to charity at that time, but there is no specific statute or ruling that approves of that concept.
If the exemption compounded annually by the AFR growth rate for the selected number of years results in a number that exceeds the trust corpus, then the inclusion ratio is 0. However, if the trust corpus grows significantly, then payment of a very substantial GSTT could be required. Since the termination is taxable, the tax would be payable by the trustee at the rate applicable at the time of termination.
Jacqueline Kennedy Onassis Charitable Annuity Lead Trust
The charitable annuity lead trust for grandchildren plan gained great visibility in the will of Jacqueline Kennedy Onassis. She created a lead trust paying an 8% annuity for 24 years, with the remainder to her grandchildren. However, the trust was not funded due to unique post-mortem planning. If it had been funded, there could very possibly have been a large GSTT payable upon the termination of the 24-year period.
