3.6.2 Living Lead Trust

Example 3.6.2 A Living 12-Year Lead Trust

Helen transfers $1 million in appreciated stock into a lead trust. The stocks have a cost basis of $200,000. Since the stocks are appreciated, it would be difficult for the trustee to diversify without the trust itself having to pay capital gains tax. Therefore, the portfolio manager carefully selects a portfolio of 14 different blue chip stocks. The trustee will hold these 14 stocks and pay out the dividends and some of the gains over the 12 years of the trust. At the termination of the trust, the appreciated stock will be distributed to Helen's children.

The trust will pay $840,000 to charity over 12 years. When the trust is created, the present value of the 7% annuity for 12 years to charity is $620,431. The $1 million gift is reduced by this amount, leaving a taxable gift of $379,569. Since this is not a present interest gift to children, the annual gift exclusion does not apply and Helen uses part of her lifetime gift exemption to cover the taxable gift.

Helen is very pleased that the $840,000 will benefit her favorite charities over the term of 12 years. At the end of that time, $1,189,771 will be transferred to her children. While the basis of the securities will be fairly low, Helen does not regard this as a problem. In fact, she sees an advantage in the low basis - it will encourage her family members to continue to hold these blue chip stocks that have been so favorable for Helen. And, if they ever do want to sell tax free, they may simply use a one-third sale and two-thirds unitrust plan and sell shares of stock without capital gains tax.

Helen also had checked into the possibility of simply holding the stock for her life. If she were to hold the stock for her life, it could grow to $1,715,458 in 12 years. However, it is quite probable that if she were to pass away at that time, there would be a substantial estate tax. After the estate tax was paid, the family would receive less than $1 million and could potentially be in a less desirable financial position than with the remainder from the lead trust. In effect, the choice for Helen is either to benefit charity with $840,000 or to benefit the federal government with a similar sum. Given that choice, Helen decides she would far prefer to benefit her favorite charity.