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Now Is the Time to Benefit Charity and Preserve Assets for Yourself or Heirs Later with a Charitable Lead Trust

Posted March 2009

In less than two years the IRS discount rate has plunged from 6.2 percent to 2.0 percent

What does the discount rate change mean to you? This steep plunge significantly affects (either negatively or positively) the tax deduction produced by various charitable vehicles. Prominent among the big winners is the charitable lead trust (CLT).

How does a CLT work? Under this plan, you put assets into a trust that makes payments to a charity for a period of time, after which the assets in the trust are returned to either you (with a grantor lead trust) or to your beneficiaries—typically children and/or grandchildren (with a nongrantor lead trust).

Why is the CLT more attractive right now? A CLT’s income- or gift-tax deduction increases as the discount rate goes down, thereby increasing the leverage the gift provides: Now, you can pass more to beneficiaries at significantly reduced transfer-tax costs with a nongrantor lead trust or generate a higher income-tax deduction with a grantor lead trust.

Example: Jim B. establishes a $1,000,000 charitable lead annuity trust that will pay our institution $60,000 a year for 20 years. After the trust term ends, the trust assets will pass to Jim’s children.

     Applying the February IRS discount rate of 2.0 percent (lowest ever), the present value of our right to receive $1,200,000 over 20 years (20 x $60,000) is $988,440. This means the gift-tax value of the children’s right to receive the trust assets after 20 years is only $11,560. Jim can use a small portion of his lifetime gift-tax exemption of $1,000,000 to offset the gift to the children.

All amounts that eventually pass to the children will be free of any federal estate tax.

To find out more about how you can take advantage of this opportunity by implementing a charitable lead trust, call us today.

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