Mark and Susan Smith are enjoying their retirement. They have been astute investors throughout their lives, and want to plan their estate wisely. The Smiths’ assets—mostly stocks, bonds, and mutual funds—have grown substantially, and they now feel comfortable making decisions to fulfill their charitable goals and financial interests. Giving a gift back to the community where they raised their family is a lifelong dream. In addition, the Smiths want to preserve a substantial portion of their wealth for their three children by limiting gift and estate taxes.

The Smiths’ estate advisor suggested establishing a charitable trust, and designating their community foundation as the vehicle for all of the Smiths’ charitable giving because it provides a simple, powerful way to fulfill their multiple charitable interests.

Mark and Susan Smith took $1 million in appreciated stocks and established a Charitable Lead Trust. During their lifetime, the trust will pay an annual fixed annuity of $75,000 to the Mark and Susan Smith Charitable Fund, a donor-advised fund with their local community foundation. After the Smiths die, the trust terminates and transfers its assets to the Smiths’ children, tax free.

Minimizing Taxes. If the Smiths had made an outright gift to their children, the entire $1 million would have been considered a taxable transfer for gift tax purposes. However, because the Charitable Lead Trust pays a guaranteed amount of income to their community foundation, the Smiths are able to claim a charitable gift tax deduction in the year the trust is created. This provides substantial gift tax benefits. In addition, the Smiths are able to avoid or minimize capital gains and income taxes on appreciated assets since the transfer is made directly to a charitable trust.

Since the transfer of assets is complete when the trust is created, no portion of the trust is included in either of the Smiths’ estates.

Family and Charitable Benefits. The Charitable Lead Trust provides the opportunity to do more than the Smiths ever imagined. By avoiding or minimizing gift, capital gains, income, and estate taxes, they are actually able to preserve more of their estate’s value for their children while giving more than $1 million to their community (assuming the Smiths live another 15 years). Better yet, the Smiths are actively involved in the use of their gift during their lifetimes.