With a Charitable Lead Trust, you give assets to a trust that pays the Vermont Land Trust set payments for a chosen number of years (or your lifetime.) The longer the length of time, the better the gift tax savings to you. When the term is up, the remaining trust assets go to you, your family, or other beneficiaries.
You can fund a Charitable Lead Trust in several ways, but rapidly appreciating assets such as stocks are especially appealing. When transferred to the lead trust, these assets are frozen in value for transfer-tax purposes. At the end of the trust’s term, all appreciation that takes place in the trust will pass tax-free to those you designate.
Jane would like to support the Vermont Land Trust and provide for her children. Following her advisor’s recommendation, Jane funds a Charitable Lead Trust with assets valued at $500,000. Jane’s trust pays $35,000 (7% of the initial fair market value) to the Vermont Land Trust each year for 15 years, which will total $525,000. After that, the balance in the trust goes to her children.
Her gift tax deduction is $405,990* against the $500,000 of assets. Therefore, only the difference ($94,010) is subject to gift tax, which is offset against her lifetime gift tax exclusion. After that, the remaining trust assets and all of their growth will pass to her family at zero additional cost in gift and estate taxes. Had Jane given the $500,000 outright to her children, it would have been a taxable gift.
*This example assumes annual payments and a 3.4% midterm federal rate.
There are two ways charitable lead trusts make payments. A charitable lead annuity trust pays a fixed amount each year to the Vermont Land Trust. They are a more attractive option when interest rates are low. A charitable lead unitrust pays a variable amount each year based on the value of the assets in the trust. If the assets go up in value, for example, the payments to the Vermont Land Trust go up as well.
Your attorney will be your principal advisor and can prepare the Charitable Lead Trust document. An important factor in the success of any Charitable Lead Trust is the selection of a competent trustee and a savvy investment manager. Because most lead trusts last for many years, the performance of the investment portfolio will determine the amount of assets that your heirs receive.
We can make the calculations for you and your attorney to help you determine whether a Charitable Lead Trust is the best option to meet your goals. Please call Christa Kemp at (802) 262-1229 to learn more.