Planning Pointer
The Grantor Charitable Lead Trust:
Make a "Temporary Gift" and Save Current Taxes
Published May 2006
The charitable lead trust is an arrangement that provides a stream of income to Saint Rose, usually for a number of years. At the end of the term, the trust assets either return to you (known as a grantor lead trust) or transfer to your beneficiaries, most often children or grandchildren (known as a nongrantor lead trust). Here we will discuss the grantor version.
A grantor lead trust provides a donor with a charitable income-tax deduction for the present value of the payments Saint Rose is to receive from the trust for a specified period of time. The donor, however, continues to be taxed on the income earned by the trust each year—including the amount distributed to Saint Rose. At the end of the trust term, the assets are returned to the donor.
Example: John has made a $250,000 pledge to be paid by 2010. Instead of making an outright gift of $250,000 in cash, John finds it is beneficial to fulfill his pledge by setting up a grantor lead trust funded with municipal bonds. In addition to using the 4-1/2% interest from the municipal bonds, the trust will systematically liquidate the bonds to make the $50,000 annual payments to Saint Rose—none of which will produce negative income tax consequences for John, assuming there is no gain realized when the bonds are liquidated. John will be entitled to a $217,675 income-tax deduction that will save him $76,186 in income taxes for the year of the gift. At the end of the trust term, $38,010 will be returned to John. This means John has been able to fulfill his $250,000 pledge for an out-of-pocket cost of $135,804. If John had made an outright gift of $250,000 his out-of-pocket cost would have been $162,500.
Planning pointers:
- Funding the trust with tax-free municipal bonds or stocks that pay qualified dividends (taxed at 15%) can avoid or minimize the income tax on trust distributions.
- For maximum impact, trust should be set up in an unusually high-income year (e.g., as a result of a large bonus, exercise of stock options, a sale of a highly appreciated major asset).
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