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Lead Annuity Trust (Tax deferral & estate planning method)


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My parents are thinking of opening up a lead annuity trust. I was wondering if anyone here is familiar with it, and if you can be so kind to share your opinions on it.


Key features:


-You get to deduct 97.618% of the amount of funds you deposit (So if you deposit $100,000, you pay taxes on only $2,382).

-Each year, 5% of the initial deposit goes to a pre-selected charity (So in the case of $100,000, $5,000 would be deducted every year).

-1% of the total value of the trust goes to your broker. There are no other fees or commissions of any sort.

-The trust will exist for 25 years, after which it will be transferred to your heirs, estate & gift tax free, with a *step-up in cost basis.

-You can invest in stocks, but not options (although this shouldn't be a problem as the options trading will occur in other accounts).

-My parents tax bracket is 33%.


I crunched some numbers in a spreadsheet, and it seems like this is a good option vs. paying 33% taxes up front (and also accounting for the taxes they'd have to pay on the $2,382), assuming that it earns greater than 10%/year. 10% is roughly the break-even, at which point it doesn't make a difference whether you pay the 33% tax upfront AND the estate tax, or invest in this trust and pay the 1% fee + $5,000. The more over 10% I earn, the better the trust is vs. a normal scenario. I assumed a 40% estate tax, because based on the new law, this seems to be permanent going forward.


My parents are eager to set up the trust before the end of the tax year. I am still cautious and want to do more research (I guess because of my value investor temperament). This is a long (25 year) commitment so I think it's important to really understand the idea. So any and all thoughts are welcome.


*Our broker told us that the heirs get a step-up cost basis at the end of the trust's life, but it seems too good to be true so I am not 100% sure on that. Anyone have an idea?


Thanks in advance for all your responses.  :)

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