A Charitable Lead Trust is the reverse of a charitable remainder trust. This type of trust can be created by a deed of a trust or a will. Donors can stipulate that an annuity or uni-trust payment be made to a fund for any duration of years, after which the principal is paid to the donors or to any other non-charitable beneficiary.

Donors do not receive a charitable deduction for federal income tax purposes with the creation of a lead trust unless they choose to be taxed on the trust income (i.e., the income that will be paid to The Scranton Area Foundation). Some people find that the chance to take a federal income tax deduction in the initial year outweighs the disadvantage of paying taxes on the trust’s income in later year. Donors can avoid a negative tax impact by funding the lead trust with tax-exempt securities.

A Charitable Lead Trust does not tax the donors and their spouses on the trust’s income and transfers the remainder of the assets to other family members allowing the ultimate transfer of the property to be made at a lower transfer tax cost. This mechanism is especially useful for property with capacity for appreciation. Charitable Lead Trusts are most sensible for a donor whose family can afford to relinquish the income from the gifted property during the term of the lead trust.

It is possible to establish a Charitable Lead Trust either during your client’s lifetime or in a will. A Charitable Lead Trust created in a will can substantially reduce the estate taxes payable at the time of death because of the charitable deduction for the Foundation’s charitable interest in the annuity or uni-trust payment. The value of the charitable interest depends on the length of the trust and the amount or percentage to be paid out each year. The saving in estate taxes means that family members may receive substantially more than if the property were left to them at your client’s death.

Similarly, if a Charitable Lead Trust is created during your client’s lifetime, generally the income tax is eliminated on the income from the assets placed in the trust. Donors can also reduce the gift tax on the property eventually passing to their children or grandchildren.