Pitzer College alumna, Deborah, 50, would like to support Pitzer and provide for her three children. Her advisor recommends that she fund a 5 percent charitable lead annuity trust with marketable securities valued at $500,000 for a term of 15 years. Deborah’s lead trust pays $25,000 (5 percent of the initial fair market value) to Pitzer each year for 15 years, which will total $525,000. After that, the balance in the lead trust goes to her children.
Deborah’s gift tax deduction is $456,526 against the $500,000 of marketable securities. Therefore, only the difference ($43,474) is subject to gift tax, which is offset against her lifetime gift tax exclusion. The remaining assets and all of their growth will pass to her family at zero additional cost in gift and estate taxes. Had Deborah given the $500,000 in marketable securities outright to her children, it would have been a taxable gift.
This information assumes annual payments and a 1.8 percent charitable midterm federal rate.