Charitable Lead Trusts

Unlike life income gifts, a charitable lead trust provides immediate funding for charitable work in the community, under an arrangement that allows donors to transfer wealth to their heirs at greatly reduced gift and estate tax rates.

Under the most common form of such a trust, the donor irrevocably transfers assets to a trustee and has income from the trust paid to The Seattle Lighthouse for the Blind Foundation, either for a certain number of years or until the donor’s death. At the end of the trust term, the principal is distributed to heirs.

The trust arrangement minimizes gift and estate taxes in two ways:

• Payments to The Seattle Foundation provide a charitable gift deduction, sheltering part of the original trust principal from gift and estate taxes. (How much depends on the annual pay-out level and the length of the trust term, as well as the charitable discount rate under the U.S. tax code.)
• Any growth in the principal over the trust term passes on to heirs without being subject to gift or estate tax. This form of charitable lead trust provides no income tax benefits. Another, less common sort of trust returns the remaining principal to the donor rather than to designated heirs. In this case, the donor does receive an immediate income tax deduction for the present value of the charitable payments. However, the donor is then taxed each year on the payments, even though they go to charity. (This option makes sense only if the donor’s tax bracket is significantly higher when the deduction is allowed, versus when the payments are taxed.)
• Income from a trust can either be paid in a fixed dollar amount (under a charitable lead annuity trust), or at a fixed percentage of the annual trust balance (under a charitable lead unitrust). A trust can be set up during the donor’s lifetime, allowing the donor to see the benefit of his or her gift to the community. A trust can also be established through the donor’s will, and perhaps be used to encourage the next generation to continue a family’s philanthropic work.

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