Some think of a lead trust as a partnership between themselves and a charity. Some think of it as a “mirror image” of a charitable remainder trust. Others think of it as a loan to charity. Regardless, the lead trust is a great way to make a significant gift to Scouting using funds that eventually will return to you or your loved ones. It’s also a great way to pass assets to your loved ones at very little cost.
In a lead trust, your assets are protected in a trust for a period you choose — either a number of years or measured by someone’s lifetime. During this period, the income is paid to the local council of your choice. You also determine the amount of income that will go to the council. Trust earnings not needed for income are accumulated as part of the trust principal. At the end of the trust, the principal (including all undistributed growth) will be distributed tax free either to the donor or to anyone selected by the donor.
Tax deductions are largely determined by who eventually receives the principal, the term of the trust and the annual payout. If the trust returns to the donor, an income tax deduction is available. If the trust goes to someone other than the donor, a gift tax deduction is available.
”Lead Trust to Donor”: A donor who just sold her business places $500,000 in cash into a 15 year lead trust paying $35,000 a year to her council (pays out 7%, earns 9%). She gets a charitable income tax deduction of more than $331,000 in the year she creates the trust. Over the next 15 years, the council receives $525,000 and the trust grows to more than $750,000 in value. At the end of the trust, the donor receives the $750,000 principal and growth in the trust.
“Lead Trust to Family”: Another donor places an identical gift into a 15 year lead trust, but he wants his children to get what’s in the trust when it ends. (This means a likely gift tax since it is a non-spousal gift). He gets a charitable gift tax deduction of $331,000, reducing the potential taxable gift to the children of $169,000 ($500,000 minus $331,000 gift tax deduction). The donor can also reduce any remaining lifetime exclusion by this amount to offset or eliminate the tax. When the trust ends, the children get the $750,000 principal and growth.
Without the lead trust, a donor might have to leave the children more than $1,500,000 in the estate just so they would net $750,000 after potential estate tax rates of 50%.
The lead trust greatly reduces the cost of making a large gift to children and — just as important — Scouting gets a sizeable gift that the council may use right away for operating needs or a capital campaign.