Passing Wealth, Values and Money Savvy with a Charitable Lead Trust

Passing Wealth, Values and Money Savvy with a Charitable Lead Trust

by Matt Wesley

The best estate plans not only enable clients to pass their wealth to their heirs in a strategic and tax-efficient manner; they help inculcate values and positive behaviors too. A charitable lead trust is one wonderful tool that you can use to accomplish these in your estate plan. The charitable lead trust allows you to ultimately transfer assets to your family at a reduced estate tax cost while making a gift to charity. It is considered a “split-interest” trust where the lead interest in the form of an income stream goes to charity for a term of years. At the end of that term, the remaining assets in the trust are distributed to your family. This gift plan produces a charitable tax deduction and freezes the taxable value of appreciating assets in the trust, enabling your family to receive the full market value after the period of income to charity.

Let’s take clients of mine as an example. Some details (including the names of the clients) were changed here to preserve confidentiality. Mary and Frank Morrison have successfully accumulated a $5 million estate. They have three children: ages 17, 19 and 23. Based on their own commitment to philanthropy, they are very interested in helping their children understand the importance of charitable work. They also want to give their children real-world experience in managing investments and working with investment advisors. If they can reduce gift and estate taxes in the process, so much the better.

The Morrisons have rapidly appreciating stock holdings worth $500,000. Stock from this portfolio is currently being used to make annual contributions to their family endowment at their favorite charity. Ultimately, however, they would like the principal and growth from this stock portfolio to go to their kids with the least tax consequences.

After talking to me and their children, they agree to create a charitable lead trust that makes distributions of 5% each year to the family endowment for a period of 25 years. At the end of the 25 years the lead trust assets will go to their children. Because they get a charitable tax deduction of $500,000, the taxable gift to their children is reduced to zero. At the end of 25 years, however, their kids could receive more than $1.1 M (at assumed return rate of 7%) tax- free.

In the meantime, the children will work with the family’s investment manager and the trustee of the charitable lead trust to invest the assets, knowing that their investment decisions impact the annual distributions to charity as well as their inheritance from the trust. They will also become more connected with the charity and witness how their family’s philanthropy helps their community.

My clients are very happy with this solution – they have the satisfaction of seeing their children grow as philanthropists and investors. Over the 25 years that the trust is in place they will learn a great deal about how their children manage money and how they would handle their ultimate inheritance. They are also giving their children a wonderful opportunity to learn about the world of philanthropy from the inside.

Matt Wesley is Founder of the Wesley Group and focuses his consulting practice on family leadership development, family assessment, and family gathering facilitation.