Carnegie Mellon University

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Charitable Lead Annuity Trust

Make a substantial gift to Carnegie Mellon University in the form of fixed annual payments over a set period of time and transfer the remaining assets to your family or other heirs at reduced tax cost.

charitable lead annuity trust may be right for you if:

  • You have substantial assets that you do not need for your own financial security.
  • You would like to provide for your family or other heirs.
  • You would like to save gift taxes, estate taxes, and probate costs.
  • You want your gift to make an immediate difference at Carnegie Mellon.
  • You could consider a gift of $100,000 or more to benefit Carnegie Mellon and your heirs.
 

 

Features of Charitable Lead Annuity Trust

Separate Trust
A charitable lead annuity trust is a separate taxable trust governed by an irrevocable trust agreement.  You choose the trustee who is responsible for administering the trust and for guiding the investment of its assets.

Make fixed payments to Carnegie Mellon each year
Your lead annuity trust makes payments to Carnegie Mellon each year of a fixed amount for the duration of its term. Your lead trust can make payments to more than one charity, if you wish.

You choose the payment amount
You choose the amount that your lead annuity trust must distribute to Carnegie Mellon each year.  A payout equal to 5% to 7% of the trust's initial value is typical.  Payments are usually made in annual installments, but semiannual, quarterly, or monthly installments are possible. 

Remaining assets to heirs 
When your charitable lead annuity trust ends, all remaining principal in the trust will be transferred to family members or other heirs that you have named.

Term flexibility
While most annuity trusts last for 10-20 years, other terms are possible.  A lead annuity trust can last for one or more lives, for a specific length of time, or for a combination of lives and years.  The term length you choose will depend on when you want your heirs to receive their trust distribution, as well as other factors.

Tax benefits 

  • Reduce or eliminate gift or estate tax on gift to heirs if your estate exceeds the then applicable estate tax credit
  • Avoid all gift and estate tax on asset growth

When you transfer assets to your charitable lead annuity trust, you make a taxable gift to the individuals who will receive your trust's principal when the term of the trust ends.  However, your gift of payments to Carnegie Mellon earns you a gift or estate tax charitable deduction in the year of your gift that will reduce, and in some cases, eliminate, your taxable gift if your estate exceeds the then applicable estate tax credit.

Some lead annuity trust donors make a point of picking a term length and payout rate that reduces their taxable gift to zero.  Doing so eliminates any possibility that they will have to pay gift tax on their gift.  

In addition, the assets in your lead annuity trust are removed from your taxable estate.  This means that any growth in the value of your trust's assets during its term can be passed on to your heirs completely free of gift and estate taxes.

Taxation of the trust 
A lead annuity trust is a taxable trust.  However, a lead trust pays income tax only if its income exceeds the amount it pays to Carnegie Mellon during the year.  A careful trustee can balance your lead annuity trust's income against its charitable payments in order to minimize income taxes.

Lead annuity trusts for grandchildren 
Lead annuity trusts for the benefit of grandchildren present special tax planning challenges related to a tax called the generation-skipping transfer tax.  For this reason, you may want to consider creating a charitable lead unitrust  instead of an annuity trust, as unitrusts allow easier planning for generation-skipping transfer tax issues.  Please be sure to discuss the tax considerations with your advisors or us if you are considering including your grandchildren as beneficiaries. 

Suitable funding assets
You can fund your lead annuity trust with many different kinds of assets.  All of the following assets can work well:

  • Cash
  • Securities
  • A closely-held business
  • Commercial property
  • A combination of these assets

Assets that are likely to increase substantially in value over time can be especially attractive candidates for transfer into a lead trust.  You will want to work closely with your advisors to pick an asset or combination of assets that will best achieve your goals for your gift.

Example

Blake Massey spent his career building a successful manufacturing business, which he sold a few years ago for $10,000,000. He and his wife, Emily, have three children who are in their 30s. Blake has been reviewing his estate plan with an eye toward adding a major gift to Carnegie Mellon. Funding a charitable lead annuity trust offers an excellent way for Blake to provide generous support to Carnegie Mellon and pass assets to his three children. Blake chooses to create a $2,000,000 trust that will pay $130,000 to Carnegie Mellon each year for 20 years.

Benefits

  • The Masseys' three children will split approximately $2,409,955* when the trust ends.
  • The Masseys will earn a gift tax charitable deduction of $1,970,320**.
  • The assets used to fund the trust will not be taxable in their estate.
  • Carnegie Mellon will receive $2,600,000 from the trust over 20 years.

* Assumes the trust assets earn a 7% annual net return.
** The Masseys' charitable deduction may vary depending on the timing of their gift.