Charitable Lead Trusts: Gifts of Income

Charitable Lead Trust

A charitable lead trust holds an income producing asset for a fixed term, or for the life of an individual, during which time income is paid to HI-USA.   At the conclusion of the trust term, the asset is returned to the donor (grantor) or to another beneficiary (nongrantor).

Grantor Lead Trust:

A grantor lead trust provides that all trust assets revert to the original owner (and/or spouse) at the conclusion of the trust term.  The donor will be entitled to an income tax deduction for the present value of the income interest to HI-USA in the year the gift is made.  This calculation is determined according to IRS regulations and is a function of several factors, including the fair market value of the assets held in trust, the term of the trust, the payout rate, and certain investment assumptions.  If the lead trust is a grantor trust, the donor is fully liable for any tax due on the income generated to the charity.  This situation may be minimized if the trust invests in tax-exempt property.

Nongrantor Lead Trust:

A nongrantor lead trust provides that all trust assets are transferred to a previously designated third party (children, grandchildren or other heirs) at the conclusion of the trust term.  There is no federal income tax deduction for nongrantor lead trusts.  However the donor gains significant estate and gift tax benefits, which may be of greater priority: trust assets are valued as of the date the lead trust is established rather than when they pass to heirs, so appreciation is sheltered from transfer tax.  A nongrantor lead trust may be subject to tax on income it may earn, but the donor is not liable for any resulting tax.

Example:

Donor has grandchildren ages 1 and 3 and would like to eventually help pay for their college tuition.  Donor also wants to build HI-USA’s Endowment through a long-term commitment.  Donor decides to fund a $250,000 non-grantor charitable lead annuity trust which will pay HI-USA $17,500 for 15 years.  If the trust earns a total return of 10 percent annually in each of the 15 years of the trust, there will be about $370,000 distributed to the two grandchildren for college expenses when the older child is 18, with little or no transfer taxes paid by Donor.

If you are considering including HI-USA in your estate plans, or would like to learn more, we suggest a gift-planning consultation.  Please email giving@hiusa.org.  

Or telephone us or use postal mail.