Charitable lead trusts (CLTs) can be an excellent way of making a gift to charity of assets that eventually will be returned to you or passed to your children or grandchildren.

Our guest author this month is Ill. Lyle L. Simpson, 33°, Valley of Des Moines, Iowa, and Development Chairman for the Orient of Iowa. Ill. Simpson is an attorney in private practice, specializing in estate and business planning. He graduated from Drake University with a B.A. in psychology and philosophy in 1960 and received a J.D. from Drake's Law School in 1963. Presently, he is President of the law firm of Dreher, Simpson and Jensen, P.C. Ill. Simpson served as Master of Kadosh in the Des Moines Valley (they manage the work of the Valley at this level and not the 14th Degree as in other Valleys). He also has been Venerable Master (14th Degree) and Assistant Personal Representative for the S.G.I.G., Ill. Gary L. Sissel, 33°.

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If your income is sufficient without the income generated from an investment, a Charitable Lead Trust could create value for you while providing income for a charity you wish to support. Charitable lead trusts (CLTs) can be an excellent way of making a gift to charity of assets that eventually will be returned to you or passed to your children or grandchildren. In a CLT, the grantor donates publicly traded securities, closely held stock, income-producing real estate, partnership interests, or a combination of these, to the trust. The trust pays a distribution to the charity for a specified time in the form of a guaranteed annuity interest or a unitrust interest. At the end of that period, the trust assets are paid to the grantor or the non-charitable beneficiary he or she chose.

If the grantor gets the assets back, the CLT is called a grantor CLT. If the assets pass to the grantor's children or grandchildren, then the CLT is a non-grantor CLT. What's the difference? For tax purposes, the IRS treats a non-grantor CLT as a separate taxpayer. So, the grantor is not taxed on income earned by the non-grantor CLT. Through the CLT, the grantor has reduced his income taxes for the term of the trust by shifting the income to the charity. Although the grantor does not get an income tax charitable deduction for the charitable interest given to the charity, the grantor can take a gift tax deduction for the gift. And, because the contributed assets are not included in the grantor's taxable estate, the grantor may significantly reduce his or her estate taxes, which could easily be as much as 50% of the value of the contributed investment. As a result, the non-grantor CLT can be a great tool to reduce the cost of intergenerational wealth transfers.

Let's look at an example. Scott Wright wants to leave $500,000 to his daughter, Amy. But, with estate tax rates as high as 50%, Scott would have to leave at least $1,000,000 for Amy to get $500,000 after Scott's estate taxes are paid. So, Scott creates a non-grantor CLT. He funds it with $500,000 and provides a fixed payment of $37,500 for 20 years to the Scottish Rite Foundation, Southern Jurisdiction. Through this CLT, the Scottish Rite will get $750,000 over 20 years. After the 20 years, the remaining assets go to Amy. If the trust assets have appreciated in value over the 20 years, Amy will inherit them free of estate and gift taxes. Scott's gift to Amy was completed when the trust was funded, and gift tax ordinarily would be due on the entire $500,000 used to fund the trust. But with the charitable gifts to the Scottish Rite made over 20 years, the gift tax is greatly reduced. The gift may be exempt by using Scott's lifetime exclusion, which is currently $1,000,000.

By comparison, in a grantor CLT, the trust assets pass to the grantor when the trust term ends, so the IRS does not consider a grantor CLT a separate taxpayer. As a result, the grantor is taxed on the trust's income when the income is realized, even the income distributed to the charity; and there is no offsetting charitable deduction. But, if the trustee of the grantor CLT voluntarily invests the trust assets only in tax-exempt assets, there would be no income taxable to the grantor. Also, the grantor can claim up front an income tax charitable deduction for the initial present value of all of the trust's payments to the charity over the trust term. The grantor can invest the tax savings immediately or can use them to buy an insurance policy to benefit his or her children so that their bequest is not diminished.

Suppose, for example, Scott Wright is 55 and wants to retire at 65. He wants to give money to the Scottish Rite Foundation, S.J., USA, but he knows he will need a lot of money to fund his retirement. So, Scott donates $200,000 of tax-exempt securities currently yielding 5% to a grantor CLT. The trustee only invests in tax-exempt securities for the trust term. The trust will pay $10,000 per year to the Scottish Rite for 10 years, and then the assets will be returned to Scott in time for his retirement. When he makes the gift, Scott gets an income tax deduction of $122,000, which at current rates saves him $48,000 in taxes. With the $48,000 savings, he buys a life insurance policy on his life in an irrevocable insurance trust for the benefit of his son. When he dies, the insurance proceeds will pass to his son outside of his estate. As the trust has invested only in tax-exempt securities, Scott will owe no income taxes on the trust's earned income, and the Scottish Rite gets a $100,000 gift paid over 10 years.

In both types of CLTs, the grantor gets a gift tax deduction. The gift of the remainder interest to the beneficiaries is valued at the time of the gift. For the value of the gift, we use IRS tables. No $10,000 gift exclusion is permitted; however, the grantor may use his or her remaining unified gift tax credit to offset the gift tax on the gift, which "is currently $1,000,000." Any subsequent appreciation of the assets during the trust term is not subject to additional gift or estate taxes. Through a CLT, you don't have to choose between making a charitable gift and leaving an inheritance to a loved one. Lead trusts make it possible to do both.

Barbara Golden is the Director of Planned Giving for the Development Office of the Supreme Council. Barbara is an attorney with experience in tax, corporate, and commercial real estate law. She managed a non-profit legal services organization for several years and has extensive experience in fundraising, grant writing, and program operations.

To learn more about the Scottish Rite Pooled Income Fund, click here. For a chart illustrating Scottish Rite Foundation, S.J., USA, Charitable Gift Annuity Rates–Single Life, please click here.

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Ill. Thomas M. Boles, 33°, G.C. (left in photo) has worked extensively in fund-raising for children's programs throughout our Fraternity. For more information on planned giving, call Bro. Tom at 562–691–4227 (Fax 562–691–5327) or the Scottish Rite Foundation, Southern Jurisdiction, U.S.A., at 202–232–3579, ext. 143. Ill. Earl E. Ihle, Jr., 33°, is our development team's Director of Major Gifts. He has been a member of the Fraternity for 25 years and served in 1978 as Master of Lafayette Lodge, No. 111, Baltimore, Maryland. He is also a member of Boumi Shrine Temple in Baltimore, the York Rite, and a dual member of the Scottish Rite Valleys of Baltimore and Washington, D.C. You can reach Bro. Ihle toll free at 1–800–486–3331, ext. 143.