George is 55 years old and married with three children. He has a portfolio worth $800,000 and wants to support Jewish Community Foundation of Los Angeles today. Following his advisor's recommendation, George creates an 18-year charitable lead annuity trust with his portfolio.
How the Trust Is Set Up
Because George wanted to witness the results of his generosity, he arranged the trust so that it provided payments to The Foundation during his lifetime instead of through his estate. George's trust pays $48,000 (6 percent of the initial fair market value) to our organization each year for 18 years, which will total $864,000. After that, the balance in the trust goes to his children.
Major Tax Benefits
His gift tax deduction is $638,3841 against the $800,000 of assets. Therefore only the difference ($161,616) is subject to gift tax, which is offset against his $1 million lifetime gift tax exclusion. After that, the remaining trust assets and all of their growth will pass to his family at zero additional cost in gift and estate taxes.2
Additional Advantages
George's children will receive a sizable inheritance, albeit not for 18 years. And after 18 years in the trust, the portfolio should be worth close to $800,000 if the underlying trust assets experience just average market performance (in this case, 6 percent growth). This will save the family unnecessary estate taxes by moving $800,000 from his estate. It also will still provide for George's philanthropic interests in a very tax-efficient manner.
1Assuming annual payments and a 3.4 percent charitable midterm federal rate.
2Currently federal estate taxes are repealed for all deaths that occur in the calendar year 2010. In 2011, estate taxes are scheduled to be reinstated for estates worth more than $1 million at rates up to 55 percent. Congress, however, is likely to address reinstating estate taxes sooner than 2011. What the final legislation will look like and when it might become effective is unknown at this point.