1. Family (non-grantor) Charitable Lead Trust – Designated assets pass into a lead trust, providing income for the San Diego Rescue Mission for a term of years. When the trust terminates, the assets pass to family with great advantages. No income tax deduction, but a strong gift tax deduction.
2. Grantor Charitable Lead Trust – Designated assets pass into a lead trust, providing income for the San Diego Rescue Mission for a term of years. Assets then return to the donor. A large first year charitable income tax deduction is equal to the present value of the trust income over its term. Annual trust income is taxable and so it is common to use a municipal bond portfolio (or growth, low yield portfolio) during the term.

Inspiring Example:

Family Lead Trust strategy succeeds in a down-market: Howard and Elizabeth Young, both in their late 50s, have been married for 25 years and have four children. The entire family has made it a priority to give back to the community and their charitable giving is a large part of their family story.

Howard has been actively trading in the markets for many years. He has a diversified and balanced portfolio that has done well, but over the last few months the market has turned downward for his particular investments. The portfolio was worth over $1.2 million earlier this year but due to a market downturn, is now valued at $800,000. Howard feels that his portfolio is very solid, as the stock holdings include many blue chip companies. He is very confident the value will recover, so he has no inclination to sell any of the holdings.

Howard and Elizabeth have an estate valued at $8.8 million and recently met with their attorney to discuss the planning of their estate. In the discussion, the issue was raised of how to transfer the stock portfolio to the children. They told their attorney that they really don’t need the income from the portfolio and don’t feel that they would ever need the stock for future needs, such as retirement. Howard and Elizabeth both have upper-level management jobs and will retire with excellent retirement benefits.

The attorney gave the following recommendation: Assume the $800,000 is transferred to a lead trust that will pay 8%, or $64,000 annually, for San Diego Rescue Mission for a period of 15 years. This will result in total income payments to a charity they care for over that 15-year period of $960,000. Because the payments will be made to charity for 15 years, Howard and Elizabeth will receive a charitable gift tax deduction (not an income tax deduction) of $764,000 and, therefore, they will be required to report and use only a small portion of their lifetime exemptions to make this transfer to the lead trust. If the assets of the lead trust appreciate annually by 4% during the 15 year term, over $1.4 million will be distributed to the children after 15 years. If the trust appreciates 6% annually, almost $2 million will be distributed to the children and, assuming average appreciation of 10%, over $3.3 million will go to the children. The nice benefit is that the projected growth in the trust will pass to the children free of gift and estate taxes.

Howard and Elizabeth are very pleased with these results, as they see that this technique is invaluable in fulfilling their philanthropic and estate planning objectives. They are able to pass substantial dollars to a charity they care for and provide their children with a very nice inheritance. If the portfolio does recover and performs well over the 15-year term of the trust, the inheritance has the potential to increase dramatically.

Inspiring Example:

Grantor Lead Trust strategy provides a significant income tax deduction and funds for charity: Barbara Johnson, age 45, recently settled a case for her client and received a fee of $1 million. Since the fee is taxable this year, she would like to generate a tax deduction to help offset the income. She is very involved with the San Diego Rescue Mission, which is currently in a campaign to expand their facilities and services. She has considered making a five-year pledge of $50,000 per year.

In consultation with an estate planning attorney, the suggestion was made that she fund a grantor lead annuity trust (CLAT) for a period of five years with the million dollars. The payout rate on the trust would be 5%, or $50,000 per year, which would be payable to the Rescue Mission. Since this is a grantor trust, the attorney explained that she would be taxed on all the trust income. However, he stated that the trust could purchase municipal bonds exempt from both federal and state taxes, and therefore all the income from the trust would be tax exempt. The primary benefit of this arrangement is that Barbara would receive a charitable income tax deduction this year based upon the present value of the income stream to the Rescue Mission over the five-year period. This deduction is over $228,000. The other benefit is that the trust assets would be returned to Barbara at the end of the five-year trust term.

The result is that giving and receiving is multiplied by the use of this arrangement. Barbara gives to the trust and receives a tax deduction. The trust gives to the Rescue Mission and Barbara receives the assets back upon termination of the trust to use for her family’s future needs.

For further information and assistance, please contact Steve de Graaf in our Gift and Estate Design Services office.

Phone: 1-619-819-1758 (Steve de Graaf) or Email:

or complete our Confidential Reply Form

Write us: San Diego Rescue Mission, P.O. Box 80427, San Diego, CA 92138-0427