Charitable Lead Trusts

One of the most complex but powerful charitable vehicles, the charitable lead trust can help you reduce or eliminate estate or gift taxes while securing future income for your children, grandchildren or other loved ones. Through the charitable lead trust, you set aside assets to benefit the TMC Foundation for a period of years, after which the assets are either returned to you or passed onto your heirs. If the assets are to be returned to you, you receive an income-tax deduction at the time you create the trust. If you plan to pass the assets on to your heirs, estate or gift taxes on the value of the gift are greatly reduced or even eliminated.

You put $1 million into a 20-year charitable lead trust to benefit the TMC Foundation. The trust agreement calls for TMC Foundation to receive $50,000 annually in income for 20 years, after which your children are to receive the principal of the trust. You do not receive an income-tax deduction and may even have to pay a gift tax to establish the charitable lead trust. However, the Internal Revenue Service considers the transfer of assets as occurring on the day you set up the trust and makes its calculation of value at that time without considering how the trust value may increase by the time it is transferred to your children in 20 years.

Say, for instance, that the IRS values the remainder of the trust at $222,000, but the principal actually grows to $3 million over the 20 years. The $3 million would pass free to your children and the TMC Foundation would have benefited from your generosity with a total of $1 million in gifts over the 20 years.