Maximize the Impact of Your Annual Giving With a Charitable Lead Trust
Sep 13, 2016
Author Jennifer Pagnillo, Esq., is co-chair of Day Pitney LLP’s Tax-Exempt Organizations and Charitable Giving practice group. A trusted advisor and attorney, Pagnillo helps families and individuals in Connecticut and New York with tax and estate planning, and estate and trust administration.
She puts special emphasis on charitable giving and the creation and operation of nonprofit organizations, including family foundations. Jennifer has represented nonprofit organizations from inception through attainment of tax-exempt status, and has facilitated the development of charitable fundraising programs.
Giving back to the community is not only an integral part of Jennifer’s career, but of her daily life. She is one of the New York City attorneys who volunteered in the citywide pro bono effort to aid families of the victims of the World Trade center attack. She also serves on Fairfield County’s Community Foundation’s Board of Trustees, and as chair of the Community Foundation’s Professional Advisors Council.
Charitable Lead Trusts: The Gift that Keeps on Giving
By Jennifer Pagnillo
Many of my clients feel it is important to give back. With properly planned legacy giving, you have the satisfaction of supporting a cause that is important to you, while also securing income and estate tax savings or providing an additional benefit for your children.
A charitable lead trust is one advantageous way for you to satisfy your philanthropic goals, while preserving wealth for your heirs. When you establish a charitable lead trust with Fairfield County’s Community Foundation, you irrevocably transfer property to the trust for a set period, during which time a “lead” interest is paid to one or more charities annually. At the end of the period, if the lead interest is appropriately structured, the remaining property can pass to your heirs free of gift or estate tax.
Three things to know about charitable lead trusts
1) They offer both tax benefits, and the ability to make an immediate impact in your community.
With many types of legacy gifts, your philanthropic contributions will make a difference to future generations in the community. A charitable lead trust, however, offers you the satisfaction of making an immediate impact in your community while also helping to secure the financial future of your loved ones.
A charitable lead trust can be established by transferring cash, securities or other assets into the trust, which will then makes annual payments to Fairfield County’s Community Foundation. Potentially, you may qualify for a federal income tax deduction for a portion of your gift. At the end of the income period, the remainder of the trust will pass to a person you designate, free of transfer tax.
2) They can leverage the value of your annual charitable giving.
The annual amount paid out to charity during a charitable lead trust’s income period is based on two things:
The Internal Revenue Service’s assumed rate of return during the month when the trust is funded (or either of the two prior months).
The length of the period over which payments are made to charity.
Currently, the IRS’s assumed rate of return is very low, at just 1.8%. This means that it is possible to leverage investment returns in the charitable lead trust, with the additional appreciation over 1.8% passing to your heirs.
If you make a fixed contribution to charity each year, it may make sense to structure the gift to go through a charitable lead trust. By transferring an amount to the charitable lead trust that is sufficient to “pre-fund” your typical charitable contributions for the entire trust income period, you have the added benefit of capturing the additional appreciation earned during that period for the ultimate distribution to your heirs.
3) They allow you to pass along a generous, tax-free gift to your heirs while ensuring a revenue stream for a cause you care about.
For a clear picture of a what a charitable lead trust can do for you, let’s imagine this scenario:
“Donna Donor” makes annual gifts to her donor advised fund of $50,000 each year.
In lieu of continuing these annual gifts, Donna opts to instead fund a charitable lead trust in September 2016 with $700,000.
Each year for the next 15 years, the charitable lead trust will pay 7.667% ($53,669) to Donna’s donor advised fund. At the end of the 15-year term, assuming a 6% growth in the trust, Donna’s heirs will receive approximately $425,000.
Over the income term, Donna’s donor advised fund will have received approximately $800,000. Donna can continue to serve as the fund advisor on this account.
Because the charitable lead trust is structured so that the distributions to Donna’s donor advised fund equal the full value of the property transferred to the trust using the IRS rate of return, there is no taxable gift to Donna’s heirs regardless of how much they receive at the end of the period.
Take the next steps with Fairfield County Community Foundation
Charitable lead trusts can be powerful investment vehicles to secure the future of both your community, and your loved ones. As with all tax strategies, additional considerations may apply given your personal facts and circumstances. Good advisors will help you maximize the impact of your annual charitable giving.
Before creating a charitable lead trust, it’s important to meet with your professional advisors as well as Fairfield County’s Community Foundation staff. By working together, we can identify how to best support your philanthropic goals and direct your gift so makes the largest impact for your intended purpose.
As a trusted nonprofit partner and thought leader, Fairfield County’s Community Foundation brings together community organizers, business experts and philanthropists to solve our region’s challenges. Our goal is to create a vital and inclusive community, where every individual has the opportunity to thrive. Learn how we can partner with you to meet your philanthropic goals through a charitable lead trust, or through another form of giving, by visiting us online at fccfoundation.org/future.
Together we thrive.