a
Separate Trust
A charitable lead annuity trust 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.
Make fixed payments to Community Foundation for Monterey County each year
Your lead annuity trust makes payments to The CFMC each year of a fixed amount for the duration of its term. Your lead trust can make payments to more than one charity, if you wish.
You choose the payment amount
You choose the amount that your lead annuity trust must distribute each year. A payout equal to 5% to 7% of the trust's initial value is typical. Payments are usually made in annual installments, but semiannual, quarterly, or monthly installments are possible.
Remaining assets to heirs
When your charitable lead annuity trust ends, all remaining principal in the trust will be transferred to family members or other heirs you choose.
Term flexibility
While most annuity trusts last for 10-20 years, other terms are possible. A lead annuity trust 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 gift to heirs
- Avoid all gift and estate tax on asset growth
When you transfer assets to your lead annuity trust, you make a taxable gift to the individuals who will receive your trust's principal when it ends. However, your gift of payments to Community Foundation for Monterey County earns you a charitable deduction in the year of your gift that will reduce, and in some cases eliminate, your taxable gift.
Some lead annuity trust donors make a point of picking a term length and payout rate that reduces their taxable gift to zero. Doing so eliminates any possibility that they will have to pay gift tax on their gift.
In addition, the assets in your lead annuity trust 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 annuity trust is a taxable trust. However, a lead trust pays income tax only if its income exceeds the amount it pays to Community Foundation for Monterey County during the year. A careful trustee can balance your lead annuity trust's income against its charitable payments in order to minimize income taxes.
Lead annuity trusts for grandchildren
Lead annuity trusts for the benefit of grandchildren present special tax planning challenges related to a tax called the generation skipping tax. For example, you may want to consider creating a charitable lead unitrust in this situation, 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 to us about these tax considerations.
Suitable funding assets
You can fund your lead annuity trust 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 are likely to increase substantially in value over time can be especially attractive candidates for transfer into a lead trust. 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.
[clt_ex_fullname] spent his career building a successful manufacturing business, which he sold a few years ago for $[clt_ex_price]. He and his wife, [clt_ex_wifename] , have three children who are in their 30s. [clt_ex_name] has been reviewing his estate plan with an eye toward adding a major gift to Community Foundation for Monterey County to his plan.
Funding a charitable lead annuity trust offers an excellent way for [clt_ex_name] to provide generous support to The CFMC and pass assets to his three children. [clt_ex_name] chooses to create a $[clt_ex_trust] trust that will pay $[clt_ex_payout] to The CFMC each year for [clt_ex_years] years.
Benefits
- The [clt_ex_lastname]'s three children will split approximately $[clt_ex_kids_payout]* when the trust ends.
- The [clt_ex_lastname] will earn a gift tax charitable deduction of over $[clt_ex_tax_dct]**.
- The assets used to fund the trust will not be taxable in their estate.
- The trust will distribute $[clt_ex_trust_dist] to The CFMC over [clt_ex_years] years.
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*
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Assumes the trust assets earn a [clt_ex_trt_return] % annual net return.
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**
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The Feaster's charitable deduction may vary depending on the timing of their gift.
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