Thursday April 18, 2024

3.5.2 Grantor Lead Trust

Grantor Lead Trust

Reversion to Grantor:   If a lead trust is created with a reversion to the grantor of trust assets that exceed 5% of value, the lead trust will be a grantor trust.

Income Tax Deduction:   The grantor lead trust qualifies for an income tax deduction.

Trust Investments:   A grantor lead trust enables the donor to report an income tax deduction in the year the trust is funded.

Donor Profile:   The grantor lead trust is typically funded by a donor in a high income tax bracket.

Reversion to Grantor

If a lead trust is created with a reversion to the grantor of trust assets that exceed 5% of value, the lead trust will be a grantor trust. Sec. 673(a). The grantor trust is subject to the Sec. 671-678 rules. All income and gains will flow through and be taxable to the grantor on his or her personal tax return.

Income Tax Deduction

The grantor lead trust qualifies for an income tax deduction. Sec. 170(f)(2). The income tax deduction will be equal to the present value of the annuity or unitrust payouts to charity for the selected term of years. However, in order to benefit from the income tax deduction, the trust must be a grantor trust. This grantor trust status includes one important rule: While the trust annuity payments or unitrust amounts are transferred to charity, the grantor must report these amounts as taxable income on his or her personal tax return. Sec. 170(f)(2)(B). In addition, if the trust recognizes capital gain, the grantor is taxable on the gain, even though the gains are held in the trust until maturity.

Since there is a charitable deduction, the lowest applicable federal rate in the current month or prior two months period should be utilized. Sec. 7520(a). The charitable income tax deduction for the distributions over the term of the lead trust is deemed "for the use of the charity" and qualifies as a 30% type deduction. Sec. 170(b)(1)(B). If the donor passes away before the trust maturity, there is a partial recapture of the charitable deduction. See Reg. 1.170A-6(c)(4).

Trust Investments

A grantor lead trust enables the donor to report an income tax deduction in the year the trust is funded. However, he or she must also report as taxable income the distribution to the charity each year. For this reason, the trust investment strategy will be designed to minimize recognition of income during the term of the trust.

There are two main strategies to achieve this favorable result. First, the trust may be funded with cash and acquire municipal bonds, preferably exempt from both state and federal tax. The municipal bond income is distributed to qualified charities. Since it is not subject to federal or state tax, there is no additional tax consequence for the trust grantor.

Alternatively, the trust may be funded with appreciated stock. The tax deduction will reduce the donor's ordinary taxable income. In effect, charitable deductions save at the top marginal ordinary income tax rate. When the stock is sold each year to make the distribution to charity, the basis in the portion sold will cause no gain recognition. The balance will be recognized at long-term capital gain rates. Even though there will be taxation on the capital gain, in many circumstances, the charitable deduction will save at least twice the tax that is later paid during the term of the trust.

Donor Profile

The grantor lead trust is typically funded by a donor in a high income tax bracket. The initial deduction, usable to 30% of adjusted gross income, saves taxes at a high ordinary rate. The subsequent payments to charity over the selected term of years are either tax-free municipal bond income or low-tax payouts of capital gain from sales of stock.

Case Studies on Grantor Lead Trust

Death of CLAT Donor Recaptures Charitable Deduction:   Dennis Collins, Jr., was a Gold Circle member of the local hospital. Currently, the local hospital approached Dennis about making a $1 million gift to their capital campaign. Dennis was very interested in helping the hospital and getting a charitable deduction.

Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 6 - Grantor Charitable Lead Annuity Trust:   Harold Henry, Age 67, is a very generous American. He is the stereotypical major donor that charities love to find. Coming from a wealthy and philanthropic background, Harold has given approximately $15 million to national and local charities over his lifetime.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 1 - The Traditional Tax Free Approach:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 2 - The Tax Me Richer Trust:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 3 - Throw Out the Trust But Not the Gift:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 4 - Stock Losses Vaporize Phantom Income:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 5 - In Search of ISOs:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 6 - Bear Market Exercises:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Extreme Makeovers for the Grantor Charitable Lead Trust, Part 7 - Diving into Dividends:   Lynn Burrows, 40, is a partner in her law firm and a very successful trial attorney. Lynn mainly represents class action lawsuits against large, multinational corporations. As a result of the high stakes and high dollar amounts involved, it is not uncommon for a jury to award a judgment of over $100 million.

Giving (and Receiving) Through a Grantor Lead Trust:   Barbara Johnson, age 45, is a prominent personal injury attorney. She recently settled a case for her client, who was severely injured in an auto accident. The case was highly publicized since the driver, who was judged negligent, was a celebrity and was driving under the influence when the accident occurred. Barbara received a fee of $1 million for the case as her share of the judgment in excess of $3 million. Since the fee is taxable this year, she would like to generate a tax deduction to help offset the income. She is very involved with her church, which is currently in a campaign to build a new auditorium. She has considered making a five-year pledge to the church of $50,000 per year. However, she would like to have access to this money sometime in the future for various family needs.

Private Letter Rulings

PLR 201730012 Conversion of Charitable Lead Annuity Trust from Non-Grantor to Grantor Trust:   Grantor, as settlor and trustee, created a charitable lead annuity trust (Trust). Grantor sought approval to amend Trust's agreement, which would convert Trust from a non-grantor lead trust to a grantor lead trust.

Related Topics on Grantor Lead Trust

3.5.3  Super Grantor Lead Trust:    Prior to 1969, it was possible to receive income, gift and estate tax deductions for creation of lead trusts. In some circumstances, the total tax benefits derived exceeded the value transferred to the trust. For this reason, the Code was changed to require the donor to recognize income if the grantor lead trust qualified for an initial charitable deduction.

3.5.7  Lead Trust Income Taxation:    A charitable lead trust may be either a non-grantor or a grantor trust. With a non-grantor, or family, lead trust, the trust is taxable and must file Form 1041 each year. Alternatively, a grantor lead trust will cause all income and capital gain to be recognized on the donor's Form 1040.

      Quiz-Basic



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