Mr. and Mrs. Jones contribute $1,000,000 to a 25-year charitable lead annuity trust to benefit Whitman College. The trust agreement stipulates that Whitman is to receive $70,000 in income annually for the purposes spelled out in the trust agreement ($1,750,000 over the term of the trust).

At the end of the 25-year term, the Jones' son and daughter, are to receive the trust principal. For gift tax purposes, only the remainder interest (what the IRS estimates the value of the trust principal will be at the end of the trust period) is subject to tax.

In this case, Treasury tables project the value of the remainder to be $70,120. The trust principal, however, actually grows to about $1,900,000 (assuming a 8.3 percent average annual return), and this is what the Jones' children receive. The difference between the value of the remainder interest under the Treasury tables and what is actually the trust value at the end of the trust term ($1,900,000) passes to the children, free of gift and estate taxes. The Jones' tax liability is based only on the projected value of the remainder interest ($70,120), and even this could be offset by their available estate and gift tax unified credit.