A charitable lead trust is a separately invested irrevocable trust you create by transferring cash, marketable securities, or income-producing property to a trustee you select. The trustee may be one or more individuals, a bank, the Library Company, or a combination of these. You designate the Library Company as the beneficiary of income for a specified period of years or for a period measured by a named person’s life. Upon completion of that period, the trust assets may revert to you or pass to persons you have designated in the trust instrument to receive them. A unique feature of a charitable lead trust is that you may tailor the Library Company’s income interest. A charitable lead unitrust pays an annual income equal to a percentage of the value of the principal; you select that percentage when you create the trust and the trustee revalues the trust each year to determine that year’s income. Each year a charitable lead annuity trust pays a fixed dollar amount that you specify when you establish the trust.
The charitable income tax deduction associated with the creation of a charitable lead trust depends on your relationship to that trust. If the Internal Revenue Service considers you to be the “owner” of the trust, you will be eligible for a charitable income tax deduction in the year you create the trust equal to the present value of the Library Company’s income stream. You will also be required each year to include any income earned by the trust in your income. If you are not the “owner” of the trust, you will not be eligible for a current charitable income tax deduction, but you will not include the trust’s income in your own. This consequence is particularly useful to a person who wishes to contribute amounts in excess of the allowable deduction levels for income tax purposes.
A Brief Example
Dr. Barbara Anderson wishes to transfer $50,000 to her son and to give the Library Company a fixed income of $40,000 each year for seven years to support general operations. A charitable lead annuity trust can achieve these goals. If Dr. Anderson is the “owner” of the trust for income tax purposes, she will be eligible for an income tax charitable deduction at the time she creates the trust of approximately $207,000, the present value of the Library Company’s income stream. Each year she will include the income from the trust in her income. If Dr. Anderson is not the “owner” of the trust, she will receive no income tax charitable deduction, but she will exclude the trust’s income from her tax base. This result is roughly the same as making annual deductible contributions of $40,000. The Library Company will credit Dr. Anderson with a gift of $280,000.