Generation Skipping Trusts
These trusts make provision for heirs to inherit the assets with the College receiving benefits during a period of the donor’s lifetime.
Lead Trust
A lead trust provides income to the College for a term of years with the remainder interest passing back to the donor or to one or more non-charitable remainderman. Real estate or securities, which are likely to appreciate, can be an excellent object to fund a charitable lead trust. The lead trust can be structured to provide the grantor with current tax benefits and a return of the assets at the end of the term or be structured to provide the grantor with gift or estate tax benefits and the assets passing to the grantor's heirs. Such trusts are most often used by wealthier individuals to pass appreciating assets to future generations and avoid gift and/or estate tax.
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Long-term Non-grantor Trust
The most popular type of lead trust is the long-term (more than 10 years) non-grantor trust. Under this method, property is placed in trust and the income, in the form of a guaranteed annuity or unitrust payment, is made to the charity for a specified number of years. The trust, not the donor, reports the income. There is no charitable income tax deduction, thus the donor is not concerned with charitable contribution percentage limitations. At the end of the trust term, the property is transferred to one or more individuals named by the donor.
Depending on the income percentage paid to the charity and the term (number of years) of the trust, the property will pass with little or no gift or estate tax.
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EXAMPLE: The donor owns an industrial property that is in the path of growth. Its present value is $500,000 and the donor believes it will appreciate tremendously in the future. The income is presently $60,000 per year. He wants his young children (ages 5 and 7) to have the property at a later date but, is concerned with the impact of future gift and estate taxes. The donor has other substantial income.
He transfers the property to a charitable long-term lead trust for 18 years, with the income interest designated to the charity. At the end of 18 years the property goes to his children (now ages 23 and 25) totally free of gift or estate taxes. Assume the property has appreciated and is now worth $1.5 million.
The charity has received $1,080,000 ($60,000 times 18 years) and the donor's children have ultimately received property worth $1.5 million avoiding any gift or estate tax (which could have been as much as $750,000 if the lead trust had not been established).
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Testamentary Charitable Lead Trust
A charitable lead trust may be created by will. The estate is allowed a charitable estate tax deduction for the present value of the income interest (at the time of the death of the donor-testator). While the heirs do not receive the income from the property until the termination of the trust, they ultimately receive the property that will have likely increased greatly in value from the time of the death of the testator.
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Grantor Lead Trust
Under the terms of a grantor lead trust, the income interest is assigned to the charity and the property reverts to the grantor/donor after a specified number of years. The donor generates a charitable income tax deduction (30% limitation with a five year carry forward) for the present value of the income interest. The donor must pay income tax on the trust's income if a short term (less than 10 years) trust is established. If a long term (more than 10 years) trust is established, the donor will pay income tax on the trust's income unless the reversionary interest enjoyed by the donor is less than 5% of the value of the trust.
Caveat
While lead trusts are complicated estate and financial planning devices, they can be of substantial benefit to both the charity and the donor but require skilled legal and tax counsel.
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Unitrust or Annuity Trust with Wealth Replacement Policy Provision
A charitable gift annuity (fixed asset) or unitrust growth asset may be structured to include a wealth replacement policy where the proceeds of an insurance policy pass tax free to the donor's heir(s).
Any examples given are meant to be illustrations of the benefits of charitable vehicles available to you. This should not be construed as legal or tax accounting advice. Always consult an attorney for specific arrangements. The College can assist you in this regard.
For further information on generation-skipping trusts, fill out the Request for Information Form or contact Bill Heaton, Vice President of Advancement at wheaton@scco.edu or at 714.449.7464.