If you want to benefit from the tax savings that result from supporting the University of Maryland, but you don’t want to give up any assets that you want your family to receive someday, you may want to consider a charitable lead trust. This gift arrangement enables you to make a significant gift to Maryland and transfer assets to one or more beneficiaries, usually children or grandchildren. Income payments from the trust would be directed to Maryland for a set number of years, after which the remaining assets transfer to your beneficiary or beneficiaries.
There are two ways charitable lead trusts make payments:
A charitable lead annuity trust pays a fixed amount each year to Maryland.
A charitable lead unitrust pays a variable amount each year based on the value of the assets in the trust. With a unitrust, if the trust’s assets go up in value, the payments to Maryland go up as well. At the end of the trust period, the principal is transferred to you or heirs.
In addition to the annuity and unitrust variations, a CLT may be created as a “grantor” or “non-grantor” trust. In a “grantor” charitable lead trust, the trust principal is paid back to you, the grantor (or your estate), at the end of the term. A transfer to this type of trust provides a current income tax deduction. In a “non-grantor” charitable lead trust, the remainder interest in the trust typically passes to your children or other family members at the end of the term. If the non-grantor charitable lead trust is created during your life, you may receive a gift tax deduction for the value of the charitable income interest.
An Example of How It Works
George would like to support Maryland and receive tax benefits. George received a windfall amount of income and needs a large income tax deduction to offset the income. Following his advisor’s recommendation, George funds a grantor charitable lead annuity trust with assets valued at $1,000,000. George’s trust pays $60,000 (6% of the initial fair market value) to Maryland each year for 15 years, which will total $900,000. After that, the balance in the trust reverts back to George. He receives an income tax charitable deduction of $614,450. Assuming the trust earns an average 8% annual rate of return, George receives approximately $1,579,621 at the end of the trust term.
*Based on a 5.2% charitable midterm federal rate. Deductions and calculations will vary depending on your personal circumstances.