The modern forms of planned gifts were defined in tax legislation passed in 1969. This legislation created the charitable remainder trust, the charitable lead trust, and the pooled income fund forms that we know today. Prior to this legislation, the tax law governing charitable gifts was generally less restrictive.
A super grantor charitable lead trust is a charitable lead trust that has both grantor trust and non-grantor trust characteristics. Sometimes called a “defective” lead trust, the trust distributes its remaining principal to the donor’s heirs when it terminates.
A balloon charitable lead annuity trust is a type of charitable lead annuity trust. Sometimes called a “shark fin” trust, it shares all characteristics of a standard charitable lead annuity trust except that its payments to charity are not the same fixed amount every year. Instead, the payments are a relatively small amount during all but the final year or final few years of the trust, then increase dramatically to a large “balloon” amount to be paid in the final year or final few years of the trust.
A step charitable lead annuity trust is a type of charitable lead annuity trust. Sometimes called an escalating payment lead trust, it shares all characteristics of a standard charitable lead annuity trust except that its payments to charity are not the same fixed amount every year. Instead, the payments increase during the term of the trust according to a pre-determined schedule that is included with the lead trust instrument.
A grantor retained annuity trust (GRAT) is a form of irrevocable non-charitable trust. During its term, the trust makes fixed payments to the donor of the trust (the grantor). When the trust terminates, its remaining principal passes to remainder beneficiaries named by the grantor, typically children or grandchildren.
A grantor lead trust is a form of charitable lead trust in which the donor of the trust is considered the owner of the trust's assets for tax purposes. The most common reason for a charitable lead trust being treated as a grantor trust is that the donor of the trust will receive the trust principal when the trust terminates.
Generation skipping transfer tax is a federal transfer tax that is assessed on an individual who transfers assets to a "skip person" during life or by will. This tax is assessed in addition to gift or estate tax. Its purpose is to prevent donors from avoiding transfer taxation in one generation by giving assets directly to the next generation.
A charity's remainder interest in a planned gift equals the present value of the promise to distribute the remaining principal of the planned gift when it terminates.
In the case of life income gifts, such as a gift annuity or a charitable remainder unitrust, the charity owns the remainder interest in the gift. In the case of a lead trust, individuals named by the donor own the remainder interest in the gift.
The remainder factor is the fraction of the funding amount of a planned gift that is considered a charitable contribution, expressed as a decimal. The remainder factor multiplied by the funding amount equals the value of the charitable contribution.
For example, if the remainder factor for a charitable remainder unitrust is .24561 and the unitrust is funded with $100,000, the value of the charitable contribution is .24561 x $100,000 or $24,561.
The non-grantor lead trust is the most common form of charitable lead trust. During the trust term, typically a fixed number of years, the trust makes payments to one or more charities. When the trust terminates, it distributes its remaining principal to individuals named by the donor, typically family members. A non-grantor lead trust is treated as an independent taxable entity that is responsible for all of its own taxes and accounting. It pays tax on income, including realized capital gain income, that is in excess of its charitable payments.