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Charitable Lead Trusts

Charitable lead trusts allow a donor to establish an irrevocable fund which distributes cash to their favorite charities for a term of years (normally, 5-20 years). When the trust expires, the assets within the trust revert to the donors or their selected beneficiaries. Donors especially like charitable lead trusts because they have the opportunity to observe how their gifts are being used (as opposed to the charity not receiving funds until the donors have died). Donors can establish a donor advised endowment fund at the San Angelo Area Foundation and advise the board of directors how to grant the charitable income from the trust.

In addition, donors who wish to leave their heirs an asset expected to appreciate significantly can use a charitable lead trust to achieve very favorable tax treatment. The asset's original transfer tax is discounted because a charitable partner receives income from the fund for several years. (The longer the charity receives a distribution, and the higher payout percentage it receives, the higher discount the trust receives.)

Furthermore, the assets within the trust can grow without additional transfer tax implications because the tax valuation is determined only at the time the property is placed in a trust. Hence, a family who owns a shopping center, a family business or producing mineral interests, might establish a charitable lead trust with assets and cash. Even if the asset is five times more valuable by the time the trust dissolves, the donors or the donors' family owe no additional tax on the transfer.

For example, in August 2003, if you irrevocably transfer $1,500,000in assets to a lead annuity trust that pays 8.9333% of its initial value each year to San Angelo Area Foundation for 13.7 years, your benefits will include: 

1) You will qualify for a federal gift tax deduction of approximately $1,500,000. 

2) Your trust will provide San Angelo Area Foundation $124,500 each year, payable in quarterly installments, for 15 years. This money will go to create an endowed donor advised fund, of which you and your heirs will have the ability to give advice on who and how much are given in grants.

3) In 15 years, the donor advised endowment fund should have over 2.8 million in assets and will have given over $1,000,000 to the charities you or your heirs have recommended. These types of gifts can continue in perpetuity.

4) The beneficiaries of your trust (for example, family members) will receive all of the trust's assets when the trust terminates. Any asset growth that occurs within the trust will be distributed to your trust's beneficiaries free of gift or estate tax.

Flexible and Inflexible Provisions
The attorney who drafts your charitable trust will remind you that this is an irrevocable gift. Even if you face financial hardship, the assets of the trust no longer belong to you and cannot be reclaimed. However, you will always have the ability to change the charitable beneficiaries named in a trust document.

If you would like to find out more about Charitable Lead Trusts and model different scenarios, please contact Matt Lewis, President & CEO for a confidential review, at 325-947-7071.