Charitable lead trusts

A charitable lead trust works by first using the assets contributed to the trust to make annual payments to the University for a term of years (usually 10 to 20). At the end of the term, the assets remaining in the trust pass to the non-charitable beneficiaries, without passing through the donor’s estate.

Benefits of a charitable lead trust

A charitable lead trust allows a donor to make a significant gift to the University, minimize his or her taxable estate, and pass assets on to non-charitable beneficiaries, such as children.

Charitable lead trusts are fairly complex vehicles with many variables to consider. It is recommended that an attorney be consulted in connection with any charitable lead trust proposal. However, with proper thought and preparation, a charitable lead trust can be an excellent way for a donor to reach personal charitable and tax-planning goals.

Frequently asked questions

Q: Who is the income beneficiary?
A: The University of Chicago, for a period of years or for the life of a designated individual.

Q: Who receives the remainder?
A: After the term of payments ends, the trust remainder goes to designated non-charitable beneficiaries (children or grandchildren).

Q: How is the payout amount determined?
A: The payout amount is a fixed percent of the initial net fair market value of the trust.

Q: Will I receive an income tax deduction?
A: No; typically a charitable lead annuity trust does not provide an income tax deduction to the donor. However, presumably the donor’s income taxes will be reduced by virtue of the fact that a portion of the donor’s assets will be transferred to a trust.

Q: Will payments be taxed?
A: Annual income of the trust is tax-free to the extent it does not exceed the annual payment to the University. Excess income is typically taxed to the trust, not the donor.

Q: Are there any gift and estate tax consequences?
A: If you name your children as the remainder beneficiaries, you will have to report the value of the future distribution of the trust to them as a gift at the time the trust is established. To the extent that the gift to your children is greater than what the IRS assumed it would be, such excess will pass tax-free.

Q: What are some advantages a charitable lead trust?
A: There are several:

  • Although you won’t receive an income tax deduction, you may reduce income taxes by removing a portion of your income generating assets to the trust.
  • There is a potential for significant gift and estate tax savings
  • The trust will ultimately be distributed to your children or grandchildren as an outright gift, giving them full control of the assets.
  • Distributions will be made to the University during your lifetime so you will see the benefits of your gift.

Disclaimer: The information above is intended to assist you in your tax, estate, and charitable planning. It is not legal advice and should not be relied upon as such. Learn more about the information on this website.