Charitable Lead Trusts Offer You Options
You can benefit from the tax savings that result from supporting the New-York Historical Society without giving up the assets that you'd like your family to receive someday with a donation in the form of a charitable lead trust.
There are two ways that charitable lead trusts make payments to New-York Historical:
A charitable lead annuity trust pays a fixed amount each year to New-York Historical and is more attractive when interest rates are low.
A charitable lead unitrust pays a variable amount each year based on the value of the assets in the trust. With a unitrust, if the trust's assets go up in value, for example, the payments to New-York Historical go up as well.
An Example of How It Works
George would like to support New-York Historical and provide for his children. George received a windfall amount of income and needs a large income tax deduction to offset the income. Following his advisor's recommendation, George funds a grantor charitable lead annuity trust with assets valued at $1,000,000. George's trust pays $70,000 (7 percent of the initial fair market value) to New-York Historical each year for 15 years, which will total $1,050,000. After that, the balance in the trust reverts back to George. He receives an income tax charitable deduction of $873,110. Assuming the trust earns an average 6 percent annual rate of return, George receives approximately $767,240 at the end of the trust term.
His gift tax deduction is $2,182,775* against the $2,500,000 of assets. Therefore, only the difference ($317,225) is subject to gift tax, which is offset against his 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. Had George given the $2,500,000 outright to his children, it would have been a taxable gift.
*Assuming annual payments and a 2.4 percent charitable midterm federal rate.