If you want to benefit from the tax savings that result from supporting CMMB, but you don’t want to give up any assets that you want your family to receive someday, you may want to consider a charitable lead trust (CLT). This gift arrangement enables you to make a significant gift to CMMB and transfer assets to one or more beneficiaries, usually children or grandchildren. Income payments from the trust would be directed to CMMB for a set number of years, after which the remaining assets transfer to your beneficiary or beneficiaries.
There are two ways charitable lead trusts make payments:
- A charitable lead annuity trust pays a fixed amount each year to CMMB.
- A charitable lead unitrust pays a variable amount each year based on the value of the assets in the trust. With a unitrust, if the trust’s assets go up in value, the payments to CMMB go up as well. At the end of the trust period, the principal is transferred to you or heirs.
In addition to the annuity and unitrust variations, a CLT may be created as a “grantor” or “non-grantor” trust. In a “grantor” charitable lead trust, the trust principal is paid back to you, the grantor (or your estate), at the end of the term. A transfer to this type of trust provides a current income tax deduction. In a “non-grantor” charitable lead trust, the remainder interest in the trust typically passes to your children or other family members at the end of the term. If the non-grantor charitable lead trust is created during your life, you may receive a gift tax deduction for the value of the charitable income interest.
Example: Mrs. Green is considering a $50,000 annual pledge to CMMB for a period of five years. In the absence of a charitable lead trust, she can claim a charitable contribution income tax deduction for the payments to charity in each year they are actually made. As an alternative, Mrs. Green transfers $1,000,000 in tax-exempt bonds to a grantor charitable lead annuity trust. The trust is designed to pay $50,000 per year to CMMB for a period of five years; after which, the trust will terminate and return its assets back to Mrs. Green.
Under this scenario, Mrs. Green will receive a charitable contribution deduction equal to the present value of the income interest being transferred to CMMB. The total amount to be distributed to CMMB over the five-year period is $250,000. The present value of the income interest is calculated to be $205,524.
For more information, contact Robert Wuillamey at firstname.lastname@example.org to discuss different options.