Estate and gift taxes can consume 50% - 75% of a large estate, reducing the inheritance for your children or grandchildren by a heart-breaking amount. You can overcome this difficulty through Charitable Lead Trusts, which offer a way to make a magnificent philanthropic gift while protecting your wealth for future generations. As a lead annuity trust donor, you irrevocably transfer assets, usually cash or securities, to a trustee of your choice (for example, the University of Miami or a bank trust department).

During the lead annuity trust's term, the trustee invests the trust's assets and provides a fixed dollar amount each year to the University of Miami. These payments are used for the charitable purpose you designate and continue until the trust term ends or until the highly unlikely event that the trust distributes all its assets. The trust's term may be for a specific number of years (10-20 years is common), one or more lifetimes, or a combination of the two. The payments are made out of trust income, or trust principal if the trust income is not adequate. If trust income during a given year exceeds the annual charitable payment, the trust pays income tax on the excess. When the lead annuity trust term ends, the trust distributes all of its accumulated assets to family members or other beneficiaries named by you.

For example, Mr. and Mrs. Phil Andrews would like for their grandchildren to inherit $10M from their estate. They know that when their children receive the estate, the $10M inheritance is reduced to about $4.5M by a 55% federal estate tax. When their grandchildren inherit the $4.5M, it is subject to a 55% generation skipping tax. The government has swallowed almost $8M of the Andrews’ generous gift, leaving only $2M for their grandchildren. A CLT allows the Andrews to make a generous gift that is free of estate and gift taxes, protecting their assets for their children and grandchildren.

Instead of letting the $10M pass to their heirs through a will, the Andrews irrevocably transfer the assets to a Charitable Lead Trust. The trustee invests the assets to generate income, and pays a charitable organization a percentage of the trust assets for a lifetime or a specified term of years, in the Andrews’ case, for 20 years. At the end of the term, the trust principal, which has increased in value, goes to the Andrews’ grandchildren free of estate or gift taxes.

The Andrews specified that 8% of the trust income would be paid to the University of Miami. At $800,000 per year, the Andrews have made a $16M philanthropic gift while protecting the $10M trust principal and its accumulated growth for their grandchildren.