Transfers to charitable lead trusts during lifetime can provide tax benefits to the donor, and can avoid inclusion of the transferred property in the gross estate of the donor for federal estate tax purposes at death. However, donors often try to keep things “all in the family” by having the required distributions from the lead interest being made to a family private foundation of which the donor is a founder and/or manager. In those situations, the donor must deal appropriately with both the trust and the foundation to obtain completed gift treatment and to avoid gross estate inclusion. Retained powers and authority via the foundation can jeopardize these items.
A 2013 private letter ruling provides a useful roadmap for obtaining both completed gift treatment and avoiding gross estate inclusion, when a private foundation is involved. The donor must act to separate himself from managing either the trust, or funds of the trust that are received by the foundation. The particular things that were done to obtain the desired tax treatment included:
a. the donor cannot serve as trustee of the charitable lead trust;
b. while the donor can serve as a director of the foundation, the donor is not permitted to vote on matters relating to disbursements or grants of funds received from the trust;
c. a quorum of the Board of Directors of the foundation, excepting the donor, established a committee, with the sole authority to receive, separately invest and make all investment decisions and administrative, grant and distribution decisions on behalf of the foundation with respect to and regarding all funds received by the foundation from the trust. The committee consists of at least three members, at least one of whom is not a director of the foundation and at least one of whom is not related or subordinate to any director of the foundation as defined by § 672(c). All actions by the committee shall require unanimous consent.
d. any funds received by the foundation from the trust will be segregated into a separate account. The committee will administer and distribute the separate account. The donor will have no power over the account or the committee.