Thursday May 2, 2024
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3.5.5 Lead Unitrust
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Lead Unitrust
Description: A charitable lead unitrust must make a payment equal to a fixed percentage of the net fair market value of the trust property, determined annually.
Leveraged Transfer to Family: The lead unitrust payout is not used as frequently as the lead annuity trust.
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Description
A charitable lead unitrust must make a payment equal to a fixed percentage of the net fair market value of the trust property, determined annually. Normally, the lead trust is valued on January 1 of each year and, to simplify administration, the trust will make an annual payment at the end of the calendar year. However, it is permissible to value the trust at any date or even to use a combination of dates. Reg. 20.2055-2(e)(2). Reg. 25.2522(c)-3(c)(2).
The lead unitrust must be a "straight" trust and make the mandatory payment to charity. Unlike the charitable remainder unitrust, it is not permissible to write a net income only or net income with makeup lead unitrust. However, since the trust is valued each year, it is permissible to make additional contributions to a lead unitrust.
Leveraged Transfer to Family
The lead unitrust payout is not used as frequently as the lead annuity trust. If the lead trust earns more than the payout percentage, the annuity trust growth accrues to family. Therefore, with the exception of the lead unitrust with remainder to grandchildren or remainder to a dynasty trust, the preferred formula for lead trusts is an annuity payout.
Lead Unitrust Versus Lead Annuity Trust Payouts
Lead Trust For 12 Years |
Corpus | Payout | Earnings Rate | Payout Type | Remainder To Family |
$1 Million | 8% | 7% | AT | $821,115 |
$1 Million | 8% | 7% | UT | $886,385 |
$1 Million | 8% | 8% | AT | $1,000,000 |
$1 Million | 8% | 8% | UT | $1,000,000 |
$1 Million | 8% | 9% | AT | $1,201,407 |
$1 Million | 8% | 9% | UT | $1,126,825 |
$1 Million | 8% | 10% | AT | $1,427,686 |
$1 Million | 8% | 10% | UT | $1,268,242 |
If the trust earns less than the payout, the lead unitrust does provide greater protection of principal. However, if the trust can earn 2% more than the payout, an annuity trust may grow substantially more than a unitrust lead trust.
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