Charitable Lead Annuity Trust

Pre-1969 Trust

The modern forms of planned gifts were defined in tax legislation passed in 1969. This legislation created the charitable remainder trust, the charitable lead trust, and the pooled income fund forms that we know today. Prior to this legislation, the tax law governing charitable gifts was generally less restrictive.

Charitable Lead Annuity Trust - Non-Grantor

A non-grantor charitable lead annuity trust is a gift plan defined by federal tax law that allows an individual to transfer assets to family members at reduced tax cost while making a generous gift to a charity. The donor irrevocably transfers assets, usually cash or securities, to a trustee of her choice, such as a bank trust department. The donor receives a gift tax deduction equal to the value of the income stream promised to the charity. Unlike income tax deductions, gift tax deductions are not subject to IRS limitations.

Charitable Lead Annuity Trust - Grantor

A grantor charitable lead annuity trust is a gift plan defined by federal tax law that allows an individual to retain ultimate possession of an asset while making a generous gift to charity. The donor transfers assets, usually cash or securities, to a trustee of choice, such as a bank trust department. The donor receives an income tax deduction equal to the value of the income stream promised to the charity. Because the gift is deemed to be “for the use of” the charity, the deduction is subject to IRS 20%/30% limitations.

Charitable Lead Annuity Trust – Balloon Payments

A balloon charitable lead annuity trust is a type of charitable lead annuity trust. Sometimes called a “shark fin” trust, it shares all characteristics of a standard charitable lead annuity trust except that its payments to charity are not the same fixed amount every year. Instead, the payments are a relatively small amount during all but the final year or final few years of the trust, then increase dramatically to a large “balloon” amount to be paid in the final year or final few years of the trust.

Charitable Lead Annuity Trust – Step Payments

A step charitable lead annuity trust is a type of charitable lead annuity trust. Sometimes called an escalating payment lead trust, it shares all characteristics of a standard charitable lead annuity trust except that its payments to charity are not the same fixed amount every year. Instead, the payments increase during the term of the trust according to a pre-determined schedule that is included with the lead trust instrument.

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) is a form of irrevocable non-charitable trust. During its term, the trust makes fixed payments to the donor of the trust (the grantor). When the trust terminates, its remaining principal passes to remainder beneficiaries named by the grantor, typically children or grandchildren.

Grantor Lead Trust

A grantor lead trust is a form of charitable lead trust in which the donor of the trust is considered the owner of the trust's assets for tax purposes. The most common reason for a charitable lead trust being treated as a grantor trust is that the donor of the trust will receive the trust principal when the trust terminates.

Generation Skipping Transfer Tax

Generation skipping transfer tax is a federal transfer tax that is assessed on an individual who transfers assets to a "skip person" during life or by will. This tax is assessed in addition to gift or estate tax. Its purpose is to prevent donors from avoiding transfer taxation in one generation by giving assets directly to the next generation.

Remainder Interest

A charity's remainder interest in a planned gift equals the present value of the promise to distribute the remaining principal of the planned gift when it terminates.

In the case of life income gifts, such as a gift annuity or a charitable remainder unitrust, the charity owns the remainder interest in the gift.  In the case of a lead trust, individuals named by the donor own the remainder interest in the gift.