Make a substantial gift to Georgetown Day School in the form of fixed annual payments and pass assets to your family or other heirs at reduced gift and estate tax cost.
A charitable lead annuity trust may be right for you if:
- You have substantial assets that you do not need currently for your own financial security.
- You want to provide for your family or other heirs.
- You want to save gift taxes, estate taxes, and probate costs.
- You want your gift to make a difference at GDS starting immediately.
- You could consider a gift of $500,000 or more to benefit GDS and your heirs.
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.
A charitable lead annuity trust is an irrevocable arrangement. Once you transfer assets to create the trust, you cannot change your mind and get the assets back. This requirement ensures that all of the payments promised in the trust agreement will go to support GDS.
Make fixed payments to GDS each year
Your lead annuity trust makes payments to GDS each year of a fixed amount for as long as the trust lasts.
You choose the payment amount
You choose the amount that your lead annuity trust must distribute to GDS each year. Lead trust donors typically select a payment amount that is likely to preserve a substantial remainder for family or other heirs. Payments are usually made in annual installments, but semiannual or quarterly installments are possible.
Remaining assets to heirs
When your charitable lead annuity trust ends, all remaining principal in the trust will be transferred to the family members or other heirs you choose.
How long can my lead trust last?
While most lead annuity trusts last for a specified term of 10-20 years, other terms are possible. Your lead annuity trust can last for one or more lives or 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 and the size of the gift or estate tax charitable deduction you want the trust to generate, as well as other factors.
Unlike a charitable remainder trust, the charitable lead annuity trust generates a gift or estate tax charitable deduction, not an income tax charitable deduction.
- Reduce or eliminate gift or estate taxes on you gift to heirs if your estate exceeds the then applicable estate tax credit.
- 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 GDS earns you a gift or estate tax charitable deduction in the year of your gift that will reduce, and in some cases, eliminate, your taxable gift if your estate exceeds the then applicable estate tax credit.
Some lead annuity trust donors make a point of picking a term length and payout rate that reduce their taxable gift to zero.
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 can be passed on to your heirs 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 GDS during the year. A careful trustee can coordinate the investment strategy with the required charitable payments to minimize the income taxes paid by the trust.
Suitable funding assets
You can fund your lead annuity trust with many different kinds of assets. All of the following assets can work well:
- 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.
Unlike with many other planned gifts, it can be problematic to fund a lead trust with highly appreciated property. Since a lead trust is fully taxable, selling a highly appreciated asset may cause the trust to owe taxes that will deplete its principal. 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.
Edward Kelly spent his career building a successful manufacturing business, which he sold a few years ago for $10,000,000. He and his wife, Ann, have three alumni children who are in their 30s. Edward has been reviewing his estate plan with an eye toward adding a major gift to GDS. Funding a charitable lead annuity trust offers a way for Edward to provide generous support to GDS and pass assets to his three children. Edward creates a $2,000,000 lead annuity trust that will pay $130,000 to GDS each year for 20 years.
- The Kellys' three children will split approximately $2,409,955* when the trust ends.
- The Kellys will recieve a gift tax charitable deduction of $1,515,604**.
- The assets used to fund the trust will not be taxable in their estate.
- GDS will receive $2,600,000 from the trust over 20 years.
* Assumes the trust assets earn a 7% annual net return.
** The Kellys' estate or gift tax charitable deduction will vary depending on the timing of their gift.