A charitable lead trust (charitable income trust) can be a useful tool to avoid significant gift and estate taxes while contributing to Benedictine University and remembering your family with a significant gift. A charitable lead trust can be created during your lifetime or at your death through your Will or revocable trust. A charitable lead trust pays annual income to Benedictine for a term of years or for the life of an individual, after which the trust’s assets are distributed to family members. The income can be determined as a percentage of the trust’s assets as revalued each year or as a fixed annuity that remains stable for the term of the trust. Such an arrangement can significantly reduce estate or gift taxes which would otherwise be due on the transfer of assets to family members.

When you transfer cash or property to a charitable lead trust, you are making two gifts: one to charity that equals the value of the annual payment to charity, and one that gives the ultimate distribution of the trust assets to your family. The economic value of the annual payment to charity, for gift and estate tax purposes, reduces the value of the gift to your family. This reduction in the value of the taxable gift to your family may be particularly dramatic where the valuation of the contributed assets can be even further reduced due to certain federal tax valuation discounts. In some instances, the economic value of the deferred gift to your family can be reduced to close to nothing.

Details involving charitable lead trusts, valuation discounts, different types of assets and the federal discount rate used to value charitable income interests must be analyzed carefully with the help of your tax advisor.

Benefits of a Charitable Lead Trust

• Reduce or eliminate gift and estate taxes on significant gifts to family
• Make significant contributions to Benedictine University

Charitable Lead Trust Example:

Joe and Jean Smith own a small office building which has a non-discounted value of $1 million and annual net rents of $60,000. Joe and Jean transfer the building into a limited partnership with the result that each of them own 50 percent of the partnership interests. Since the real estate is now in partnership, for tax valuation purposes, neither the real estate nor the partnership interests are considered to be readily marketable. Because of this lack of marketability and the minority ownership interests, an appraiser appraises the partnership interests with more than a 30 percent discount to the underlying value of the real estate. Joe and Jean transfer their limited partnership interests into a Benedictine University Charitable Lead Trust which will pay $60,000 annually to charity for 20 years. At the end of the 20 years, the trust distributes the partnership interests to their children. Because of the discounts applied to the valuation of the contributed assets and the high charitable payout, the gift to the children is valued for tax purposes at close to zero. Thus, with the valuable asset, Joe and Jean have made a significant gift of the asset’s income flow to Benedictine, and transferred that asset to their children (after 20 years) with essentially no gift or estate tax consequences.