Planned Giving: Charitable Lead Trusts

Are you seeking to lower your gift and estate taxes AND still be able to give your children and grandchildren a larger inheritance?

Then establishing a charitable lead trust will be perfect for you planned giving plan.

Charitable lead trusts allow for wealthy individuals, with large taxable estates, to pass assets to their heirs at reduced tax rates.

At the same time, you will be provided the Alaska Farmland trust with sustained support, ensuring our ability to protect the agricultural community in Alaska.

Talk to your attorney, as they will be your principal advisor and will prepare the charitable lead trust document after discussing your preferences for designing and structuring the trust. We will help you with the calculations and provide the necessary forms for the lead trust document.

Before the Alaska Farmland Trust can can make  the calculations you’ll need to provide us with the following:

  • How long the trust will be in existence (called the duration or term)
  • what annuity rate will be paid to the charity
  • estimated fair market value of your asset that will fun the charitable lead trust. At that time it will be important to know your tax basis in that asset.

For this style of trust to be successful for you, it is critical that you find a trustee that is competent and is a savvy investment manager.  Because this style of trust lasts for many years, it is important that you research the investment portfolio to determine how much will be passed o your heirs.

If land will be used to fund the Charitable Lead Trust obtain an appraisal of the land prior to the trust being finalized. You must use the appraisal within 60 days to complete transfer of land to the charitable lead trust.  If you don’t, an appraisal update will be needed.

If your gift is in the form of securities, the final value of the securities will be determined the exact day the securities transfer into the trust.

The tax benefits of a charitable lead trust are calculated from a wide variety of factors including:

  • Value of donated asset
  • Duration of trust
  • type of trust (grantor or non-grantor; annuity trust or unitrust)
  • charitable payout rate
  • federal discount rate (set by the Federal Reserve Board, changes monthly)

The Alaska Farmland Trust can assist you in making the calculation to these plethora of variables.  It is important to understand that the LONGER the trust term and the HIGHER the annual payout rate to charity, the greater the tax deduction will be.

 

It depends which type of trust you wish to establish:

Unitrusts:

Structure: The trust’s assets are valued annually. At this point the charity receives a fixed percentage of the amount on an annual basis. In this model, the actual payment will fluctuate depending the asset value.

Annuity Trust:

Structure: An annuity trusts pays out a fixed annual payout that remains constant, regardless of the value of the assets.

The tax deduction will vary depending on which form of the trust you choose.  How much the charity is given versus how much of the asset will be passed to the heirs once it is terminated all go in to formulating the tax deduction.

Prior to establishing the trust, you would need to determine how much you want to go to the charity based on the IRS formula.

Yes, but good planning is critical.

Unless the land is income producing, sufficient OTHER assets need to be placed in the trust to make sure the annual payments to the charity are met while STILL carrying the cost of managing the property.

Otherwise, the land will have to be sold.

In the instance of the land/property being sold, if the land has conservation value, we encourage the donor to place a conservation easement on the property BEFORE it is placed into the trust.

While the trust is in existence, you and your heirs will not have access to the principal nor the trust income.  Prior to establishing the trust, it is critical to make sure your financial resources will meet the future needs of you and your family.

  • This is an excellent hands off way for you to support your favorite charitable organizations with dependable gifts.
  • You, as the donor get to choose how long the trust is around for.  For instance, you can design the Charitable Lead Trust to exist until such a time as the assets would make a big difference in your heirs life such as for when grandchildren go to college or your children would be set to retire.
  • This is an excellent way for the very wealthy to transfer assets with a reduction in the gift and estate tax.  As the trust’s assets are removed from the donors estate, forgoing taxation on the donor.  Any appreciating of value of the asset would then pass along to the heirs, rather than the donor.
  • There are no income tax advantage when setting up a non-grantor lead trust.  You, the donor, will receive a gift tax deduction.
  • If the trust is established upon the donor’s death, then the donor will receives an estate tax deduction.
  • Whether an estate tax deduction or a gift tax deduction, the amount of the deduction needs to be determined using a complex IRS formula. We can assist you in determining what the potential deduction would be.

As an irrevocable trust account, charitable lead trust can be funded using cash, stock, bonds, land or other marketable assets.  Once established the trust makes payments to designated charities on a periodic basis. When the trust ends, the remaining assets are distributed to the designated heirs.

Charitable Lead Trusts exist for a set term of years or by the lives of one or more individuals.  While in existence, the trustee (or designated trust manger) invests the assets of the trusts  and distributes the annual payments to the selected charities.  The trustee is generally a lawyer or financial institution.

Please Note: There are two types of charitable lead trust: (1) the assets revert to the donor when the trust ends called a grantor lead trust; and (2) assets pass to designated heirs (non-grantor lead trusts).  In the rest our information, we will stick with talking about non-grantor lead trusts as MOST charitable lead trusts are used to distribute assets to their heirs.

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This website is intended to be an educational guide only and should not be seen as legal, accounting or any other professional advice.  Please consult with the professionals in the instance that you would like to make a bequest to the Alaska Farmland Trust.