A Charitable Lead Trust Benefits Charities & Families

Here’s an idea for giving your resources for social impact today, and follow it up with a gift to your family.

Let me illustrate this strategy by thinking of a plan for client who is interested in giving to grandchildren, but is willing to delay that gratification a bit (I see a lesson in self-control here), and provide for a good cause at the same time.

First, grant me the assertion that a gift to grandchildren, especially when received too young in life, is unpredictable in its effect. If it is a small amount, it does not, perhaps, make much difference how it ends up being used or abused because, these days, a few thousand dollars will not go very far. Regardless of the size of the gift, one hopes that it will be very much appreciated.

A few hundred or a few thousand dollars is not a candidate for the strategy I am describing here. But a more sizable gift to grandchildren in the tens of thousands or more, could be given in this manner. In effect, after a period of “delayed gratification” as I refer to it, during which the charity receives the income, the distribution can be made to family – in my illustration here, to the grandchildren.

Here’s how it works: Say that a client wanted to leave $300,000 to their grandchildren, to be divided among them in equal shares which would be received when they are at a mature age, such as 25 or 30 years old. These are grandchildren who, if they receive the money earlier, could easily blow it, or will feel compelled to spend the money on their education, for good reason. (Note: It is also bad time of life for children to receive a gift from grandparents when they are college-age because it can diminish their qualification for financial aid, if that is a consideration.) The gift may be the seed for savings and investment, or retirement. My favorite use is for the grandchild to take that money and fund Roth IRAs over many years.

For a term of years preceding the gift to the grandchildren, the money would be used for the benefit of some charitable pursuit that the client cares about. The term probably would be 10 or more years in order for the impact of the charitable portion of the gift to be especially meaningful and to time the receipt for grandchildren at a mature age later on.

This arrangement is called a “charitable lead trust,” so-named because the charity gets the up-front benefit and the remainder goes to the people-beneficiaries, typically family members.  

A very nice effect of this approach is that the client earns an income tax deduction. The deduction is equal to the present value of the stream of payments to the charity. For example, a 10 year distribution from the trust to a charity has an up-front value today which becomes the charitable deduction. The present-value is determined in part by today’s interest rates, which provides a measure of the value of a lump sum or a stream of payments, today.

If the assets gifted are highly appreciated, then you also avoid paying the capital gains taxes if sold once they are donated to the trust. The assets are also removed from the estate using up little or no gift tax exclusion amount. In other words, your heirs save estate taxes.

If the trust is set up and funded during your lifetime, you currently will get a nice charitable deduction, subject to the latest rules on itemizing deductions.

With a gift to grandchildren, there are unique benefits that are not present when making a gift to children.  Here are a few:

1. Grandchildren will notice the gift and be grateful whereas kids think they are entitled (sorry, but it’s true). Combining with a gift to charity says you put your money where your mouth is when it comes to causes you believe in.

2. Giving to grandkids in equal amounts shows their equal standing in the eyes of the grandparents.

3. Often grandchildren are in lower income tax brackets than their parents, so their receipt of the funds will thereafter (if invested), yield interest, dividends and capital gains, which may be taxed at a lower marginal rate than their parents.  Thus, in a sense, both generations are better off because their collective tax is lower.

4. Finally, the gift to grandchildren is never going to be taxed, for estate tax purposes, at the children’s generation. The amount given to grandchildren is not included in the estate of the children, who have been skipped over.

Few of us can give enough to have buildings named after us, but we can still have a meaningful impact on the causes we support, as well as on our families by way of the message that it conveys. With the tax benefits to the donor, a charitable lead trust is win-win for all.

If a charitable lead trust sounds like it will suit your needs, set up a complimentary consultation.

This article was originally published via WealthManagement.com.