Make a substantial gift to Georgetown Day School in the form of annual payments and pass assets to your family or other heirs at reduced gift and estate tax cost.
A charitable lead unitrust may be right for you if:
- You have substantial assets not needed 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 Georgetown Day School starting immediately.
- You could consider a gift of $500,000 or more to benefit GDS and your heirs.
Separate trust
A charitable lead unitrust 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.
Irrevocable gift
A charitable lead unitrust is an irrevocable arrangement. Once you transfer assets to create the trust, you cannot change your mind and get the assets back. This requirement assures that all of the payments promised in the trust agreement will go to support GDS.
Make payments to GDS that vary each year
Your lead unitrust makes payments to Georgetown Day School each year equal to a fixed percentage of its value, as revalued annually. If the value of your lead unitrust increases, its annual payments will increase. If the value of your lead unitrust decreases, its annual payments will also decrease.
You choose the payment rate
You choose the percentage of its value that your lead unitrust must distribute to GDS each year. Lead unitrust 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 unitrust ends, all remaining principal in the trust will be transferred to family members or other heirs you choose.
How long can my lead trust last?
While most lead unitrusts last for 10-20 years, other terms are possible. Your lead unitrust 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
Unlike other a charitable remainder trust, the charitable lead unitrust generates a gift or estate tax charitable deduction, not an income tax charitable deduction.
- Reduce or eliminate gift or estate taxes on your 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 unitrust, 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 unitrust donors make a point of picking a term length and payout rate that reduce their taxable gift to zero.
The assets in your lead unitrust are removed from your taxable estate. This means that any growth in the value of your trusts assets during its term can be passed on to your heirs completely free of gift and estate taxes.
Taxation of the trust
A lead unitrust 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 payments to minimize the income taxes paid by the trust.
Lead unitrusts for grandchildren
Lead trusts for the benefit of grandchildren present special tax planning challenges called the generation-skipping tax. Many donors choose to create a charitable lead unitrust in this situation, as opposed to a charitable lead annuity trust, as it is easier to plan for generation-skipping tax issues. Please be sure to talk to your advisors or us about these tax considerations.
Suitable funding assets
You can fund your lead unitrust 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 you expect 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 unitrust with highly appreciated property. Since a lead unitrust 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.
Example
Delores Foster, a 60-year-old current grandparent, has been thinking about making a leadership gift to Georgetown Day School for some time. She has hesitated to part with her assets because of the two young grandchildren she’d like to provide for when they’re older.
After consulting with her advisor, Delores learns that funding a charitable lead unitrust offers an excellent way to provide generous support to Georgetown Day School and pass assets to her young grandchildren.
Delores creates a $1,000,000 trust that will pay 6% of its value, as revalued annually, to Georgetown Day School each year for 25 years. By making the trust term 25 years, Delores delays transferring assets to her grandchildren until they are in their early 30s. By then, she expects them to be mature enough to handle their assets responsibly.
Benefits
- Delores’s grandchildren will split approximately $1,282,432* when the trust ends.
- The assets Delores uses to fund the trust will not be taxed in her estate.
- Georgetown Day School will receive annual payments from the trust that will increase from $60,000 to $76,184* over 25 years.
- Delores will receive a gift tax charitable deduction of $769,645**.
* Assumes the trust assets earn a 7% annual net return.
** Delores’s charitable deduction will vary depending on the timing of her gift.