Charitable Lead Annuity Trust

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.

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.

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, and then increase dramatically to a large “balloon” amount to be paid in the final year or final few years of the trust.

A charitable lead annuity trust is a way for a wealthy donor to pass assets on to heirs at little or no gift or estate tax cost while providing a generous gift to one or more charities at the same time. During its term, the lead trust makes payments each year to the charity(ies). Whatever assets remain in the lead trust when it terminates are distributed to individuals named by the donor, typically family members. Unlike a charitable remainder trust, which is tax-exempt, a charitable lead trust is a taxable entity, so trust investments need to be managed with this in mind.