CAN IRA DIRECTLY CONTRIBUTED TO CHARITABLE LEAD TRUST?
Charitable lead trust will distribute set percent or amount to designated qualified charity for 10 to 20 years at end balance will go to my grandkids. what are tax consequances?
Charitable lead trust will distribute set percent or amount to designated qualified charity for 10 to 20 years at end balance will go to my grandkids. what are tax consequances?
Permalink Submitted by Bruce Steiner on Sat, 2021-12-25 00:23
An IRA can’t contribute to a charitable lead trust.
As you point out, a charitable lead trust provides for payments to charity for specified number of years. The payments are designed to have a present value at the Section 7520 rate (presently 1%, but going up to 1.4% in January 2022) equal to the amount contributed. For example, a 20-year trust set up today with $1 million would pay about $55,415 a year to charity. Whatver is left goes to your family free of estate and gift tax.
There are some possible variations on the above.
A charitable lead trust is best suited for people who expect to have taxable estates, and who make substantial contributions to charity each year.
Bruce Steiner
Permalink Submitted by gautam SHAH on Sat, 2021-12-25 15:04
Thank you Bruce for detail information. what will cost and maintain LEAD CHARITABLE TRUST? what will be tax write off for initial 1 million contribution? I assume money can be invested in stocks bonds mutual funds and some options. is there yearly tax on capital gain? at end 10 or 20 years family can get remaining amount estate income and gift tax free? Thank you again you are best.
Permalink Submitted by Bruce Steiner on Sun, 2021-12-26 17:24
You can set up a charitable lead trust as a grantor trust or as a nongrantor trust (separate taxpayer). If it’s a grantor trust, you get a tax deduction for the contribution (subject to limitations) (assuming the present value of the charity’s interest is equal to the contribution, which is usually the case), and you’re taxable on the trust’s income. If it’s a separate taxpayer, you don’t get a deduction for the contribution, and the trust is taxable on its income (but gets a deduction for the distributions to charity). Most charitable lead trusts are grantor trusts.
It’s not that expensive to set up a charitable lead trust, usually not much more than any other trust unless someone needs more time in the decision making process or wants unusual terms. The annual cost is a little more than for most trusts since the tax return for a charitable lead trust (Form 5227) is more complicated than the return for most trusts (Form 1041), and since accountants do far fewer of them, though after the first year the difference shouldn’t be as great. So it may not be practical for a small amount, but it should be practical for $1 million or more.
Permalink Submitted by gautam SHAH on Tue, 2021-12-28 21:52
Thank you Bruce. IRA asset in 2022 after paying taxes is ROTH conversion v/s CHARITABLE LEAD trust what is better route . benefit going to grandkids and tax write off is importanr charity getting benefit is bonus
Permalink Submitted by Bruce Steiner on Tue, 2021-12-28 23:46
You can’t give an IRA to a charitable lead trust (or anyone else) during lifetime. An IRA owner whose children or grandchildren are young (but at least 27), are likely to need distributions, are unlikely to have taxable estates, will have other money available for one-off needs, and are at low risk of creditors or divorce, might want to leave IRA benefits in charitable remainder (not charitable lead) trusts to replicate the stretch.
You wouldn’t leave Roth IRA benefits to a charitable remainder trust. You would only leave traditional IRA benefits to a charitable remainder trust.
You may create a charitable lead trust (with non-IRA assets) during lifetime. If you set it up as a grantor trust (which most are), you’ll get a large charitable deduction. However, most of the benefit will go to charity. This works well for someone who makes substantial charitable contributions on a regular basis.