Lead Trust - Lesser of Life or Term
Helen White has been giving serious consideration to providing an inheritance for her children. She has an estate of several million dollars and knows that if she were to pass away, there would be a large estate tax. In addition, Helen gives approximately $80,000 to $90,000 each year to her favorite charities.
Example 3.6.3A EZ Lead Trust
Helen asks her attorney Mary Johnson whether or not there is a way that she can continue to provide for her charities and yet leverage her exemption to enable her to start passing inheritance to family. Mary notes that Helen could set up a charitable lead trust with perhaps $1 million of selected blue chip securities from her portfolio. The lead trust could pay 7% for 12 years to charity. This lead trust would reduce by approximately 60% the taxable gift and would allow Helen to leverage her gift exemption.
Helen likes the concept. After all, she is already making the charitable gifts. If the gifts - instead of being taxable to her and then deductible when given to charity - are made through a lead trust, there is no net income tax difference to her. However, she has a concern. What if she were to pass away prior to the expiration of 12 years? She would like to know that the inheritance would be available for children if that unfortunate event should occur.
Mary notes that if Helen is willing to give up a small part, perhaps 5% to 6%, of her charitable gift tax deduction, she could enhance the lead trust by writing the trust for the lesser of Helen's life or a term of years. While it is not likely that Helen would pass away prior to the 12-year term, if that did happen, the trust would then immediately pass to family members.
Helen is delighted with the plan. She still receives a charitable gift tax deduction of $526,498, reducing the taxable gift of the $1 million in assets to $473,502. If she survives the 12 years, the family would receive nearly $1.2 million in securities. Although there will be a low basis and appreciation, she intends for the family to hold the securities anyway. And, if she were to pass away prior to the 12-year term, the securities would immediately be distributed to family.
