What Is A Charitable Lead Annuity Trust?

One of the most popular forms of charitable lead trust comes in the form of a charitable lead annuity trust document. This document is tailored to the individual needs of the donators, by their lawyers and the beneficiaries' lawyers together, who will be acting as trustees for the fund. Similar to a charitable remainder trust, a charitable lead trust allows the donor to transfer certain assets to the charitable lead annuity trust. This action allows the donor to reduce estate taxes in the event of their passing. The principal difference with a charitable lead annuity trust compared to a charitable remainder annuity trust, is that the charity receives the income and the beneficiaries will eventually receive the principal. The period of time can be after the donor passes away or after a pre-determined period.

The effect of this is that the since the beneficiaries can receive the fund for a period of time determined by the donor, and carried out by the trustees, Then the amount of estate tax to be paid is considerably reduced.

Therefore a charitable lead annuity trust would only those who are not looking for an income for the period that the trust will be active, with a charitable lead annuity trust, the donors can nominate anyone they choose to eventually enjoy the full assets of the trust fund after the period of time has elapsed. And you want someone other than the charity (perhaps your spouse, children or grandchildren) to eventually have the assets.

The tax advantage for the donor lies in the fact that the earnings of the fund after the fixed rates percentage of the profits that go to the benefactors, can remain in the fund. Based on the assumption that the funds value will appreciate every year, and at the termination of the period or in the event of the donor passing away, then the taxed paid profits can be transferred to the benefactors in the donor's will.

In order to qualify as being a charitable lead annuity trust, the current value of the lead interest must equal 10% of the value of the assets in the current fiscal year, within a federally imposed 5% probability test.

An average donor who is interested in establishing a charitable lead annuity trust is someone who needs a fixed additional income for their pre-pension years up to the end of their lives. There are other key factors to be decided. They are as follows.
  • Naming the beneficiaries of the allowable income from the fund.
  • Naming the charities that will benefit from the fund.
  • Setting an annual payout rate for the fund.
  • Deciding how often the payouts will be made ( Monthly or quarterly)

Unlike other forms of charitable trusts, once the trust has been established, the donor is disallowed from having too much to do with the dealings of the trust. Decisions on the day to day running of the trust are solely placed in the hands of the trustee only.