Contents
Contents Contents
§ 5.7 CHARITABLE LEAD TRUSTS(a) General RulesA charitable lead trust is a vehicle by which property transferred to it is apportionedinto an income interest and a remainder interest. Like the charitableremainder trust and the pooled income fund, it is a split-interest trust. Pursuantto a charitable lead trust, an income interest in property is contributed to a charitableorganization, either for a term of years or for the life of one individual orthe lives of more than one individual. The remainder interest in the property isreserved to return, at the expiration of the income interest (the lead period), to thedonor or some other noncharitable beneficiary or beneficiaries; often the propertypasses from one generation (the donor’s) to another.The charitable lead trust can be used to accelerate into one year a series ofcharitable contributions that would otherwise be made annually, with a correspondingsingle-year deduction for the “bunched” amount of charitable gifts.In some sets of circumstances, a charitable deduction is available for thetransfer of an income interest in property to a charitable organization. There arestringent limitations, however, on the deductible amount of charitable contributionsof these income interests.A charitable lead trust can be funded by a donor or donors during lifetime,as well as by means of transfers from an estate.The charitable lead trust is frequently used to transfer property from onemember of a family to another, usually from one generation to the next. Forexample, a father may establish a charitable lead trust, providing income fromthe trust to a charitable organization for a term of years, with the trust corpus tothereafter pass to his daughter. This type of transfer may be subject to a gift tax,but the actual tax cost of the gift is substantially reduced because of the reductionin the amount transferred to the ultimate beneficiary by the value of theincome interest contributed to a charitable organization. If a charitable lead trustis used to shift property to a generation other than the immediate next one, thetransfer may be subject to the generation-skipping transfer tax.The income interest created for a charitable organization by means of a charitablelead trust is defined in one of two ways. The income interest may be statedas a guaranteed annuity or as an annual payment equal to a fixed percentage ofthe fair market value of the trust property, valued annually. These interests havethe same names as in the charitable remainder trust context; the first of theseinterests is an annuity interest and the other is a unitrust interest.An annuity interest or a unitrust interest in property may, as discussedabove, be created by means of a charitable remainder trust. These interests aresubject to minimum amounts that must be payable to the income beneficiaries.An income interest created by a charitable lead trust, however, is not governedby any minimum or maximum payout requirement.Also, as discussed, an income interest in property created by means of acharitable remainder trust may be measured by a term of years. The incomeinterest term established by a charitable remainder trust cannot be longer than20 years. By contrast, there is no restriction in federal law on the length of theterm during which the income interest is payable to a charitable organizationout of a charitable lead trust. 163
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§ 5.7 CHARITABLE LEAD TRUSTS(a) General RulesA charitable lead trust is a vehicle by which property transferred to it is apportionedinto an income interest and a remainder interest. Like the charitableremainder trust and the pooled income fund, it is a split-interest trust. Pursuantto a charitable lead trust, an income interest in property is contributed to a charitableorganization, either for a term of years or for the life of one individual orthe lives of more than one individual. The remainder interest in the property isreserved to return, at the expiration of the income interest (the lead period), to thedonor or some other noncharitable beneficiary or beneficiaries; often the propertypasses from one generation (the donor’s) to another.The charitable lead trust can be used to accelerate into one year a series ofcharitable contributions that would otherwise be made annually, with a correspondingsingle-year deduction for the “bunched” amount of charitable gifts.In some sets of circumstances, a charitable deduction is available for thetransfer of an income interest in property to a charitable organization. There arestringent limitations, however, on the deductible amount of charitable contributionsof these income interests.A charitable lead trust can be funded by a donor or donors during lifetime,as well as by means of transfers from an estate.The charitable lead trust is frequently used to transfer property from onemember of a family to another, usually from one generation to the next. Forexample, a father may establish a charitable lead trust, providing income fromthe trust to a charitable organization for a term of years, with the trust corpus tothereafter pass to his daughter. This type of transfer may be subject to a gift tax,but the actual tax cost of the gift is substantially reduced because of the reductionin the amount transferred to the ultimate beneficiary by the value of theincome interest contributed to a charitable organization. If a charitable lead trustis used to shift property to a generation other than the immediate next one, thetransfer may be subject to the generation-skipping transfer tax.The income interest created for a charitable organization by means of a charitablelead trust is defined in one of two ways. The income interest may be statedas a guaranteed annuity or as an annual payment equal to a fixed percentage ofthe fair market value of the trust property, valued annually. These interests havethe same names as in the charitable remainder trust context; the first of theseinterests is an annuity interest and the other is a unitrust interest.An annuity interest or a unitrust interest in property may, as discussedabove, be created by means of a charitable remainder trust. These interests aresubject to minimum amounts that must be payable to the income beneficiaries.An income interest created by a charitable lead trust, however, is not governedby any minimum or maximum payout requirement.Also, as discussed, an income interest in property created by means of acharitable remainder trust may be measured by a term of years. The incomeinterest term established by a charitable remainder trust cannot be longer than20 years. By contrast, there is no restriction in federal law on the length of theterm during which the income interest is payable to a charitable organizationout of a charitable lead trust. 163