A Church Building Fund’s Friend: The Lead Trust

April 24, 2009 by  
Filed under Featured

electrician150x131The current poor economy provides a climate for some planned giving techniques to yield greater benefits than any time in recent history. One example is the charitable lead trust.

A lead trust is normally funded with income-producing assets. In one model, the trust pays a stipulated percentage for a certain number of years to a charity. At the end of the designated time frame, the trust assets either revert to the donor or are passed to children or grandchildren.

If you are a church leader, you’ll want to pay special attention because lead trusts are funded with an average of five million dollars.

What could your church do with an income stream of 5-10% on 5 million dollars paid for 5 to 20 years?

 A lead trust can be a solution for people who have specific problems or goals. For example…

  • They’ve received a large bonus or just sold a business and need a large current tax deduction.
  • They have a stock portfolio that has decreased substantially in value but feel certain that the stocks will rebound in time.
  • They have a large estate that will be taxed at 50%+ and they want to pass their estate on with little or no inheritance tax.
  • They have a large estate and don’t want to dump significant wealth all at once on children who may not yet be financially responsible.

So why is a lead trust such a good deal now?

One of the components of the formula that computes the income tax deduction a person gets is the Applicable Federal Rate, AFR for short. Due to the decline in interest rates, the AFR has reached record lows. The lower the AFR the higher the tax deduction.

$1,000,000 Lead Trust Paying 5% for 10 Years

AFR

Tax Deduction

8 %

335,000

5 %

386,000

2 %

449,000

 

Charitable lead trusts have many applications and can simultaneously provide a benefit to your church.

Here’s one example…

Tom is the CFO of a software company. He’s 51 and wants to retire at age 60.

Tom’s income has averaged $400,000 for the last few years.

His company just landed a multi-year contract. Since Tom was instrumental in piecing together the financial part of the deal, he will receive a one million dollar bonus this year.

He really doesn’t need the additional million in income and is not too excited at the prospect of $400,000 going to taxes. He would like to sock as much away as he can for his retirement.

Tom is very active in his church and his church has just embarked on building a new addition.

Tom puts his million-dollar bonus into a 9 year lead trust which will pay 5% to his church for 9 years. This produces a charitable income tax deduction of $400,000, saving him $160,000 in taxes.

Since his million dollars will come back to him in 9 years, he is taxed on the $50,000 a year the trust pays to his church. One of Tom’s options is to have the lead trust invest in municipal bonds so there won’t be any tax due.

However, since the stock market is down, Tom feels he can do better by paying some tax with a good prospect of getting more than his million dollars back after nine years.

So he instructs the trustee to invest in high-grade stocks that are projected to grow at 8%.

Tom’s million dollars will grow to $1,375,000 after nine years. So not only did he save $160,000 in taxes in year one, the extra $375,000 comes back to him tax-free as well.

The trade off is to pay taxes on the $50,000 the trust will pay to his church each year for the next nine years.

In addition, Tom’s church receives $450,000 over the nine years to help pay for its church addition.

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  • Brooke Fraser

Comments

One Response to “A Church Building Fund’s Friend: The Lead Trust”
  1. JessicaNef says:

    Great point and very interesting food for thought. I’m not sure I have any clients I can replicate this with, but will bear in mind for the future. Regards

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