By Roger C. Hurd

HURD, HORVATH & ROSS, P.A.
Palm Beach Gardens, FL

A charitable lead annuity trust is a trust which pays a set amount to a charity for a period of years. After that period of years is over, the trust will terminate and be distributed to the benefit of beneficiaries, such as children or grandchildren. In your Federal Estate Tax Return, you are able to take a deduction for the present discounted value of the income stream payable to the charity.

For example, if you were to establish upon your death, a twenty-year 8% charitable lead trust with a principal value of $1,000,000.00, $80,000.00 per year would be paid to charity. Assuming the IRS Monthly Interest Rate Tables utilized a 6.6% interest rate, then your estate would receive a charitable deduction in the amount of $765,205.00. Hence, over 75% of the property transferred to this trust would be deductible.

At the end of 20 years, this property could pass to your designated beneficiaries. Money that would otherwise go to the Internal Revenue Service as estate taxes are used to fund the trust and eventually return to the family.

Two factors influence the amount of the deduction: 1) the length of the term of years and 2) the interest rate factor chosen. The longer the terms of years, the greater the deduction. The higher the annuity rate factor, the greater the deduction.

The charitable lead annuity trust is an extremely effective vehicle, however, it is essential that the amount paid to the charity be at a reasonable rate that can be obtained over a long period of time. Obviously, if payments have to be made from the principal in order to supplement the amount payable to the charity, then the charitable lead trust's effectiveness is greatly diminished.