ESTABLISHING A LEAD TRUST
What is a lead trust?
Lead trusts provide an ingenious way for very wealthy individuals to protect their substantial assets for their children and grandchildren from the ravages of estate and gift taxes. A lead trust is an irrevocable arrangement that provides annual gift income from the lead trust assets to a charitable institution, such as the University, over a period of years. At the end of the period of years, the remaining lead trust assets are given to non-charitable beneficiaries, usually children or grandchildren. Lead trusts are particularly appropriate for assets that are likely to appreciate substantially over the life of the trust (typically 10-20 years).
Can I establish such a trust with either a fixed or variable payout?
Yes. The payout, if fixed, would be a percentage of the value of the assets at the time the trust is established; the payout, if variable, would be a percentage of the value of the assets calculated on an annual basis.
What are the benefits of a charitable lead trust?
At present a person can transfer over $1 million to family members through a charitable lead trust with no payment of gift or estate taxes through use of a combination of the charitable deduction and the exemption equivalent. A lead trust is particularly beneficial if the assets have great appreciation potential. Many people have used these trusts to pass very valuable properties to children and to
grandchildren at little or no tax cost.
What types of assets can be used to establish a lead trust?
Assets likely to appreciate substantially over the life of the trust (typically 10-20 years or more) are the most suitable. Assets most commonly used to fund a lead trust are public securities, i.e., stocks and bonds, or income-producing real property that is likely to increase in value, such as commercial property.
Will the establishment of a lead trust have an effect on the size of my taxable estate?
Yes. It may be greatly reduced. At present it is possible to transfer significant assets to family members through a charitable lead trust with substantially reduced federal gift or estate taxes.
When is it most appropriate to establish a lead trust?
Whenever you feel confident that you can permanently, or in some cases temporarily, live without the income generated by the assets you will use to establish the lead trust.
Whom might I select as a trustee for a lead trust?
Your choices include a corporate trustee, a private trustee such as a trusted family friend or associate, or in certain cases, a family member.
What might be an appropriate amount to use in establishing a lead trust?
It depends upon how much income you would like to provide to the University every year. A $1 million lead trust might provide a fixed income of $50,000 or more per year to the University. A lead trust with variable income may produce relatively more as the trust grows over time.
I have heard lead trusts also described as testamentary trusts. What is the difference?
Lead trust is a more general term. A "living lead trust" is the more complete name given to a lead trust in effect during your lifetime. A "testamentary lead trust" is one designed to go into effect at the time of your death.
What are the steps involved in establishing a lead trust at the University of Michigan?
- The Office of Medical Development sends you sample calculations showing projected income and tax implications.
- You and your attorney develop a lead trust document, naming a trustee (other than the University) and specifying trust terms, such as payout to the University, identity of the individual remainder beneficiaries and length of time before trust termination.
- Our attorney reviews the completed trust document supplied to us by your legal counsel.
- Upon mutual agreement, the charitable lead trust is initiated.