Charitable Lead Trust

Your gift of a charitable lead trust has an immediate benefit to charity and significant tax savings for you or your family.

This increasingly popular trust makes regular income-tax-deductible gifts to charity as the income beneficiary. When the trust terminates, the entire principal is returned to you or to your family.

The main tax advantage is that no estate tax will be due on the growth of principal. Some people use a lead trust to capture a deduction while guaranteeing future gifts to charity in a high-income year.

When you create a Charitable Lead Trust, Rochester Area Foundation will enroll you in our legacy society, the Community Heritage Society (if you choose), which honors those who make lasting gifts to the community. Find out more about the Community Heritage Society.

General Description

You transfer cash or other assets irrevocably to a trust, creating two interests.

The income interest (either a percentage or fixed dollar amount) is paid annually to the Rochester Area Foundation for a term of years (more common) or for your life.

The remainder interest (the final value of the assets in the trust) is paid to you, or those you choose, when the trust terminates.

Tax Considerations

When the remainder is paid to someone other than you or your spouse (a non-grantor lead trust), you receive a federal gift or estate tax deduction for the present value of the income interest given to Rochester Area Foundation.

Any taxable income generated and capital gain realized is taxed to the trust.

However, the trust is allowed an unlimited charitable deduction each year for the income distributed to Rochester Area Foundation.

It is possible to transfer the remainder to others free of estate or gift tax or at a reduced level.

When the remainder is paid to you (a grantor lead trust), you receive a federal income tax deduction for the present value of the income interest given to Rochester Area Foundation. However, taxable income generated and capital gain realized by the trust is taxable to you.

Example

Mrs. Smith transfers $1 million in cash to a non-grantor charitable lead trust. The trust makes a $70,000 payment to Rochester Area Foundation each year for 15 years. Mrs. Smith chooses to have the annual payments go into the J. Smith Family Fund, her donor-advised fund at Rochester Area Foundation. When the trust terminates, the remainder transfers to Mrs. Smith's heir, her granddaughter Nancy.

With this gift plan, Mrs. Smith accomplishes the following:

  • She makes gifts totaling $1,005,000 over a 15-year period to Rochester Area Foundation.
  • By choosing to have the payments go into her donor-advised fund at Rochester Area Foundation, she was able to support her favorite charities, recommending grants from the donor-advised fund to these organizations.
  • She leaves a $1-million asset to her heir(s) when the trust ends.
  • She reduces the amount of her estate subject to gift or estate tax from $1 million to about $150,000.