Fostering Lifelong Learning - Episcopal Academy

Development
Charitable Lead Trusts —
A Welcome Contribution to Ever Episcopal
John. J. F. Sherrerd '47, retired
investment banker, generous
benefactor, and Ever Episcopal
Campaign Co-Chair, has used a
charitable lead trust in the past.
He offers this comment: "For a
supporter of The Episcopal Academy,
a lead trust can be gratifying
because of the direct and immediate
benefit to the school. You can see
and experience the results of your
gift during your lifetime."
In what is regarded as one of the largest single gifts to an
American independent school, George School in Newtown,
PA was awarded an extraordinary donation from
an alumna in September 2007. The school reportedly will
receive payments that will total $128.5 million over a period of
twenty years from a charitable lead trust. What, you may ask,
is a charitable lead trust
A charitable lead trust (CLT) is a powerful way to transfer
assets to your heirs at significantly reduced gift and estate tax
cost, while supporting one or more charities with income payments
for a period of years. If you want to help finance capital
gifts during your lifetime but also want to transfer assets to
your family at greatly reduced transfer costs, consider a lead
trust. (A lead trust may also be designed to return assets to
the grantor. This article focuses on the more common type,
the non-grantor lead trust.) Because the income payments provide
current, not deferred, support to a nonprofit, it is the only
planned gift that can help finance a construction project.
Briefly, this is how a non-grantor lead trust works: You place
assets in a trust and direct that income distributions go to EA to
finance a project of your choice. After a set period of time, the
assets are transferred to the trust beneficiaries—often children
or grandchildren—at reduced estate or gift tax rates.
Lead trusts are timely now for four reasons.
• Individuals may support philanthropic projects today while
still transferring assets to their heirs. Thanks to new campus
construction, there are many projects currently on EA’s drawing
board. Lead trusts provide current support of Episcopal so
you can see the results of your gifts.
• For gift and estate tax purposes, assets are valued as of the
date of the trust. If you fund the trust with assets that appreciate
over the life of the trust, such as stock or commercial real
estate, any appreciation will pass tax-free to your heirs.
• A lead trust can be used to make pledge payments. If you’ve
already made a commitment, you can use the trust income to
pay your pledge payments.
• The IRS discount rate (more formally known as the Section
7520 rate) dropped to 4.4% for January 2008—the lowest the
rate has been since December 2004. The IRS uses a special discount
rate to calculate the present value of remainder interests
left by charitable trusts. Published monthly, the Section 7520
rate is based on the federal mid-term interest rate. The lower
the IRS discount rate, the lower the calculated remainder value
of a trust. In the case of a Charitable Lead Trust, where the
remainder value goes to heirs, a lower discount rate translates
into lower gift and estate taxes.
Example: Cliff has an estate in the 45 percent federal tax
bracket. His son will be in that bracket, too. For each $100,000
he leaves to his son off the top of his estate, Uncle Sam will get
$45,000 and his son will get $55,000. Then, when the $55,000
passes from his son to the grandchildren, Uncle Sam may take
another 45 percent, or $24,750, depending on the estate and
gift taxes at that time. So the original $100,000 will shrink to
$30,250
To minimize the tax bite and to help us, Cliff creates a
$400,000 lead trust that will pay us 7 percent of its initial value,
or $28,000, for 20 years—for a total of $560,000. When
the trust ends, the principal will go to Cliff’s son. Based upon a
4.4 percent IRS discount rate, this plan will result in a $367,400
gift tax deduction. In other words, Cliff’s lead trust will reduce
the transfer tax burden on $400,000 by 92 percent. If assets
have appreciated during the life of the trust, his son stands to
inherit considerably more than the original
$400,000—all at minimal transfer
cost.
This is just one example. The size of the
trust, its term and type and the annual
payout are up to you. For more information,
contact Carolyn Jaeger, Director
of Planned Giving, at 610-617-2252 or
jaeger@episcopalacademy.org.
This information is provided as an educational
service and is not intended as financial or legal advice,
either in whole or in part. Consult your legal
or tax advisor before making any decision regarding
this information.
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