Separate trust
A charitable lead unitrust is a separate taxable trust governed by an irrevocable trust agreement. You choose the trustee who is responsible for administering your lead trust and guiding the investment of its assets.
Irrevocable gift
A charitable lead unitrust is an irrevocable arrangement. Once you transfer assets to create the trust, you cannot change your mind and get the assets back. This requirement assures that all of the payments promised in the trust agreement will go to support MBA.
Make payments to MBA that may vary each year
Your lead unitrust makes payments to Montgomery Bell Academy each year equal to a fixed percentage of its value, as revalued annually. If the value of your lead unitrust increases, its annual payments will increase. If the value of your lead unitrust decreases, its annual payments will also decrease. Your lead trust can make payments to more than one charity, if you wish.
You choose the payment rate
You choose the percentage of its value that your lead unitrust must distribute to Montgomery Bell Academy each year. Lead unitrust donors typically select a payment amount that is likely to preserve a substantial remainder for family or other heirs. Payments are usually made in annual installments, but semiannual or quarterly installments are possible.
Remaining assets to heirs
When your charitable lead unitrust ends, all remaining principal in the trust will be transferred to family members or other heirs you choose.
How long can my lead trust last?
While most lead unitrusts last for 10-20 years, other terms are possible. A lead unitrust can last for one or more lives, for a specific length of time, or for a combination of lives and years. The term length you choose will depend on when you want your heirs to receive their trust distribution, as well as other factors.
Tax benefits
- Reduce or eliminate gift tax on initial gift if your gift exceeds the then applicable gift tax credit.
- Avoid all gift and estate tax on asset growth.
When you transfer assets to your lead unitrust, you make a taxable gift to the individuals who will receive your trust's principal when it ends. However, your gift of payments to Montgomery Bell Academy earns you a charitable deduction in the year of your gift that will reduce your taxable gift. In addition, the assets in your lead unitrust are removed from your taxable estate. This means that any growth in the value of your trust's assets during its term can be passed on to your heirs completely free of gift and estate taxes.
Taxation of the trust
A lead unitrust is a taxable trust. However, a lead trust pays income tax only if its income exceeds the amount it pays to Montgomery Bell Academy during the year. A careful trustee can balance your lead unitrust's income against its charitable payments in order to minimize its income taxes.
Lead unitrusts for grandchildren
Lead trusts for the benefit of grandchildren present special tax planning challenges related to a tax called the generation skipping tax. Many donors choose to create a charitable lead unitrust in this situation, in particular, as it is easier to plan for generation skipping tax issues when creating a lead unitrust than when creating a lead annuity trust. Please be sure to talk to your advisors or us about these tax considerations.
Suitable funding assets
You can fund your lead unitrust with many different kinds of assets. All of the following assets can work well:
- cash
- securities
- a closely-held business
- commercial property
- a combination of these assets
Assets that you expect to increase substantially in value over time can be especially attractive candidates for transfer into a lead trust.
Unlike with many other planned gifts, it can be problematic to fund a lead unitrust with highly appreciated property. Since a lead unitrust is fully taxable, selling a highly appreciated asset may cause the trust to owe taxes that will deplete its principal. You will want to work closely with your advisors to pick an asset or combination of assets that will best achieve your goals for your gift.
Brian Valadez, 60, is financially secure. Brian has been wanting to make a leadership gift to Montgomery Bell Academy for some time, but has hesitated to part with her assets because of the two young grandchildren she'd like to provide for when they're older.
Brian is delighted to learn that funding a charitable lead unitrust offers an excellent way to provide generous support to Montgomery Bell Academy and pass assets to her young grandchildren.
Brian chooses to create a $1,000,000 trust that will pay 6% of its value, as re-valued annually, to Montgomery Bell Academy each year for 25 years. By making the trust term 25 years long, Brian delays transferring assets to her grandchildren until they are in their early 30s. By then, she expects them to be mature enough to handle their assets responsibly.
Benefits
- Brian's grandchildren will split approximately $1,282,432* when the trust ends.
- The assets Brian uses to fund the trust will not be taxed in her estate.
- Montgomery Bell Academy will receive annual payments from the trust that will increase from $60,000 to $76,184* from the trust over 25 years.
- Brian will receive a gift tax charitable deduction of $769,645**.
* Assumes the trust assets earn a 7% annual net return.
** Brian's charitable deduction may vary depending on the timing of her gift.
