Wednesday April 24, 2024

3.5.5 Lead Unitrust

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.

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
CorpusPayoutEarnings RatePayout TypeRemainder 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.

Private Letter Rulings

PLR 200018062 Lead Trust May Hold Limited Partnership Units:   A charitable lead unitrust was created in the husband's estate in 1989. In the wife's 1996 estate, a substantial addition was made to the lead unitrust. The lead unitrust pays charity 8.15% for a term of nine years, with the remainder to children and grandchildren.

PLR 200240027 Charitable Lead Unitrust Produces Gift Tax Deduction and is Not Subject to Estate Tax:   Husband and wife created one charitable lead unitrust (CLUT) for each of their three children. Each 6% payout CLUT was drafted to last 20 years, with payments to charity made annually. The trust documents gave the trustee discretion to pay the unitrust amount each year to qualified organizations in such proportions as the trustee so determined.

PLR 200328030 No CLUT Deduction When Donor Retains Power to Change Charitable Beneficiary:   Donor proposes to establish a charitable lead unitrust (CLUT). The CLUT shall pay Donor's foundation a 5% unitrust payout for a period of 20 years. Donor's children will serve as trustees of the CLUT. Pursuant to the trust instrument, Donor reserves the power to amend, revoke, add or substitute charitable income beneficiaries.

Related Topics on Lead Unitrust

1.4.5  Lead Unitrust GSTT:    In contrast to a lead annuity trust, a lead unitrust is permitted to calculate the applicable fraction as of the testator's date of death. This enables the trust to use a formula or other allocation method that zeros out the GSTT. With a lead unitrust, the applicable fraction equals the allocated exemption divided by the fair market value of the property minus the charitable deduction. If the allocated exemption is equal to the present value of the taxable gift, the applicable fraction equals 1-1. Since the inclusion ratio equals one minus one or zero, the lead unitrust is exempt from GSTT.

3.5.6  Gift/Estate Tax Deductions for Lead Trust:    A charitable lead unitrust or annuity trust must pay the fixed unitrust percentage or the fixed annuity to one or more qualified charities each year to qualify for gift or estate tax charitable deductions. Reg. 20.2055-2(e)(2). Reg. 25.2522(c)-3(c)(2).

      Quiz-Basic



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