The Charitable Lead Trust may be an attractive gift vehicle when your goal is to make a generous gift to The Wharton School and achieve certain income or estate tax planning objectives. A charitable lead trust holds income-producing assets for a term of years, or for the lifetime of an individual, during which time annual payments are designated to Wharton – either a fixed annuity payment, or a “unitrust” payment that varies annually based on the trust’s performance. At the end of the term, the trust assets are paid back to the donor, or to the donor’s children or grandchildren.

A “grantor” charitable lead trust reverts to the donor at the end of the term. The donor is able to take an income tax deduction when the trust is set up, but thereafter the income of the trust is included in the donor’s taxable income. This can provide a good tool for “smoothing out” income, if it is set up in the year of a spike in the donor’s income – for example, due to an unusually high bonus.

A “non-grantor” charitable lead trust reverts to other individuals, most commonly the donor’s children or grandchildren. The gift tax on the future interest to heirs is calculated and accounted for up front, and the remainder interest (including any undistributed growth) is distributed to the heirs with no additional gift or estate tax. For a variety of reasons, this type of charitable lead trust is particularly effective in a low-interest rate environment. The trust itself is subject to income tax, but may take a deduction for distributions to charity.

Benefits of a Charitable Lead Trust

• Your gift to Wharton is made “up front” so you can see your philanthropy in action
• A non-grantor CLT can provide significant gift and estate tax advantages, enabling you to make transfers to heirs at a lower tax cost
• In addition, any appreciation in the CLT is distributed to heirs without additional tax
• A grantor CLT can assist in smoothing out income if created during an unusually high-income year

A UNIQUE GIVING OPPORTUNITY

John, W’65 and Mary Porter have two grandchildren ages one and three who will be headed to college in about fifteen years. Education has always been an important priority of both John and Mary and they would like to ensure that their grandchildren have the funds available for their college education. John, having attended Wharton on scholarship would also like to build a scholarship endowment through a long-term commitment. John and Mary decide to fund a $500,000 charitable lead annuity trust which will pay Wharton $25,000 per year for fifteen years, enabling them to establish the John J. and Mary Porter Endowed Scholarship. If the trust earns a total return of 8% annually in each of the fifteen years of the trust, there could be as much as $900,000 in trust principal when the first of their grandchildren turns 18 years old.