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.
Make payments to SEU that may vary each year
Your lead unitrust is revalued annually and makes payments to Saint Elizabeth University each year equal to a fixed percentage of its value. 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. Your lead trust can make payments to more than one charity, if you wish.
You choose the payment rate
You choose the percentage of its value that your lead unitrust must distribute each year. A payout equal to 5% to 7% of the trust value is typical. Payments are usually made in annual installments, but semiannual, quarterly, or monthly 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.
Term flexibility
While most lead unitrusts last for 10 to 20 years, other terms are possible. A 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
- Reduce or eliminate gift tax on initial gift if your gift exceeds the then applicable gift 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 principal when it ends. However, your gift of payments to the Saint Elizabeth University earns you a charitable deduction in the year of your gift that will reduce your taxable gift. In addition, the assets in your lead unitrust are removed from your taxable estate. This means that any growth in the value of your trust 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 Saint Elizabeth University during the year. A careful trustee can balance the income from your lead unitrust against its charitable payments in order to minimize its income taxes.
Lead unitrusts for grandchildren
Lead trusts for the benefit of grandchildren present special tax planning challenges related to a tax called the generation skipping tax. Many donors choose to create a charitable lead unitrust in this situation, in particular, as it is easier to plan for generation skipping tax issues when creating a lead unitrust than when creating a lead annuity trust. 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. 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.
Britney Fowler, 60, is financially secure. Britney has been wanting to make a leadership gift to the Saint Elizabeth University for some time, but has hesitated to part with her assets because of the two young grandchildren she'd like to provide for when they're older.
Britney is delighted to learn that funding a charitable lead unitrust offers an excellent way to provide generous support to the Saint Elizabeth University and pass assets to her young grandchildren.
Britney chooses to create a $1,000,000 trust that will pay 6% of its value, as revalued annually, to Saint Elizabeth University each year for 25 years. By making the trust term 25 years, Britney 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
- Britney's grandchildren will split approximately $1,282,432* when the trust ends.
- The assets Britney uses to fund the trust will not be taxed in her estate.
- The Saint Elizabeth University will receive annual payments from the trust that will increase from $60,000 to $76,184* from the trust over 25 years.
- Britney will receive a gift tax charitable deduction of $769,645.**
* Assumes the trust assets earn a 7% annual net return.
** Britney's charitable deduction may vary depending on the timing of her gift.
