Posted October 1st, 1997

Charitable Intent and Tax Concerns Result in $1 Million Lead Trust

Although the charitable beneficiary of this lead trust wishes to remain anonymous, the story of this gift bears repeating and may inspire your organization to take another look at the charitable lead trust as a valuable gift planning vehicle.

THE GIFT: A $1 million charitable lead trust, funded with appreciated securities. The trust will pay $80,000 annually for 15 years to a community foundation for healthcare. At the end of 15 years, the trust assets will be distributed to the donors’ children and grandchildren in generation skipping trusts.

THE DONORS: Jean and Michael Ford (pseudonyms are used for anonymity) were in their late sixties when the gift was completed early last year (Michael passed away within six months). They were active community leaders in their small midwestern town of approximately 15,000 people. A successful business owner, Michael served on the boards of many local charitable organizations including, since its inception, the community healthcare foundation that received this gift.

THE ORGANIZATION: The charitable recipient is a two-year-old community foundation focused on healthcare philanthropy. Currently the foundation consists of an executive director, administrative assistant, and 15 board members.

The foundation “evolved out of a capital campaign for a new community hospital,” said the organization’s executive director. “Local leaders wanted this to be a foundation serving the healthcare needs of the entire community, not just the new hospital,” he stated. To date, the foundation has contributed funds to 13 local health-related nonprofits.

BACKGROUND OF THE GIFT: The Fords had a history of giving back to the community, having been generous donors to the previous hospital as well as contributing major funding and leadership during the capital campaign for the new facility. After the community healthcare foundation was formed, Michael took on another leadership role as a board member. And, when the foundation decided to encourage estate planning reviews by its donors and friends, Michael once again led the way by putting his own estate through a review process.

The executive director believes this estate planning review was key to “the gift of a lifetime” the foundation would later receive. “The Fords already had a good estate plan that had been revised recently,” he said. “However, when the Fords realized what their potential estate taxes would be and how this would affect their heirs and charitable goals, they wanted to learn more about reducing these taxes while helping the local community.”

ABOUT THE GIFT: The charitable lead trust took approximately seven months to arrange. During that period, the Fords met several times with the executive director and other representatives of the foundation to discuss various options. “The gift would not have come about without a number of months of education for the couple on how the community and their family could benefit from certain tax incentives,” noted the executive director. The Ford’s children were also involved in the planning process and supported their parents’ charitable intentions.

THE MOTIVATION: The Ford’s concerns were twofold; first, providing for their children and grandchildren in the wisest way possible and, secondly, making a significant gift that would help save lives in their small community.

While a family (non-grantor) charitable lead trust is a taxable trust, it is allowed an unlimited charitable deduction for required payments to the charitable beneficiary. The family beneficiaries’ future interest is a taxable gift, but at a substantial discount because of the present value of the income flowing to charity. In the Ford’s case, they were able to give $1 million of assets while using only slightly more than $300,000 of Michael’s $600,000 unified credit equivalent amount in the process. The value of the gift for estate tax purposes was determined at the time the trust was funded. Any capital growth in the trust goes to family in 15 years, free of estate tax. Although all of the above was appealing from the estate planning standpoint, what really motivated Jean and Michael was the ability to invest what is anticipated to be more than $1 million in payments to benefit the community and lead the way in building up the area’s healthcare services.

THE GIFT’S MESSAGE: Although they will rarely, if ever, be the cornerstone of most organizations’ gift planning programs, charitable lead trusts do offer certain donors a unique way to fulfill their charitable goals while they reduce the taxes that could possibly “devour” over half of their estate. Perhaps the executive director of the community foundation said it best: “Maybe the gifts aren’t driven by tax benefits, but they certainly are enhanced and often triggered by them.”

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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