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The CHARITABLE LEAD TRUST (CLT) is still one of the most powerful estate planning tools available to the
professional adviser. The CLT provides for a yearly distribution to charity, with the remainder, usually after a
term of years, going to family members The CLT accomplishes two important objectives: Helping a favorite
charity, and passing property to family at major discounts for transfer tax purposes.
In the current patchwork environment, resulting from the 2001 tax bill, who among your clients is still
concerned about estate taxes? Should anyone pay attention to estate taxes now that the lifetime exemption is
$1 million and increasing?
Estate Tax Concerns. Today professional advisers need to advise clients to pay attention to their estate plan,
and possible tax consequences, especially if the client is:
a. Single with an estate over $1 million
b. Married with a combined estate over $2 million
c. Elder clients with significant wealth
d. Clients who have used their lifetime exemption, or most of it.
Estate taxes should be of particular concern to older clients who may not live to see repeal, or the high
lifetime exemptions scheduled to take effect in 2006. These clients should be advised that money to charity
can take the place of money to the federal government in the form of taxes. The Charitable Lead Trust is the
most powerful way of leveraging the lifetime estate tax exemption.
Lifetime or Testamentary CLT? Under the old law, with an appreciating stock market and unified credit (credit
for gift and estate taxes being the same), we frequently advised lifetime CLT’s to leverage the credit, benefit a
favorite charity, shed appreciating assets, and pass property to family at discounts of 80%-90%. For example,
$1 million of assets could be transferred to a CLT, provide a payout to a favorite charity (including a family
foundation), with a remainder interest to family members after a period of years, with the family gift
comprising only 10%-20% of the underlying value, or sometimes even less.
With a tax value of the underlying asset transferred to the CLT, at 10%, and with an exemption of $1 million,
that means that a total of $10 million in property can be transferred to a CLT, during lifetime, or at death,
without incurring estate or gift tax. What leverage!
Peace of Mind. How does a wealthy and/or elderly client get some peace of mind about the potential estate
tax burden, avoid paying taxes, if that is important to the client, and still be reasonably certain that the plan will
provide the results anticipated?
The answer is often a Testamentary Charitable Lead Trust. A Testamentary Trust takes effect at death, and
can be established by Will or under the terms of a Revocable Trust.
Drafting a Testamentary CLT in today’s environment is a challenge because we are dealing with at least
three unknowns as of the date of death:
a. Asset values
b. Amount of the lifetime exemption
c. Applicable federal interest rate (AFR)
These unknowns create a drafting challenge, to create a formula for the CLT to obtain the maximum tax
advantages. If the client’s goal is to pay zero estate tax, the CLT formula must be carefully crafted to provide
for these unknown, shifting factors.
Variables. To arrive at the taxable value of a Testamentary CLT, the variables are:
1. The annual percentage payout to Charity
2. Term of the payout
3. Applicable Federal Interest Rate (AFR)
For example, at an AFR of 5.6% an annuity payment of 7.5% to charity for 25 years would produce a taxable
gift of 0.4%, practically nothing. Adjusting the charity payment and the term of years can increase the taxable
gift to coincide with the increases in exemptions.
Raising the payout to 7.6% and reducing the term to 20 years, would yield a $992,600 taxable gift, effectively
using the lifetime exemption, passing $10 million, free of tax!!
If the lifetime exemption has increased to $1.5 million, the Trust could be structured for a payout of 7.4% for
19 years, yielding a taxable gift of 14.785%, or $1,478,500, effectively utilizing the taxpayer’s lifetime exemption
of $1.5 million.
Combination of CLT’S. Suppose it makes family planning sense to transfer wealth to children in 10 years,
when they approach retirement, and to pass wealth to grandchildren in 25 years, the same $10 million could
be passed to children and grandchildren, with a $1.5 million lifetime exemption, free of tax, as follows:
Children, after 10 years: $3,750,000
Grandchildren, after 23 years: $6,250,000 both using an 8% CLT.
The point is that these numbers can be adjusted with tremendous charitable benefits, passing wealth to
family members without any contribution to the federal tax revenues.
Conclusion. Careful drafting of formulas for CLT’s can zero-out estate taxes. For wealthy clients, this
procedure, when combined with a private foundation, enabling family members to continue to manage
wealth, makes much more sense than paying large estate taxes.
You can bet that wealthy individuals such as Bill Gates, Warren Buffet and Ted Turner are utilizing these
techniques or variations thereon to fund their private foundations and avoid turning over half their wealth to the
federal government. Shouldn’t your wealthy clients be pointing in the same direction?
If we can assist your clients in addressing tax saving strategy using Charitable Lead Trusts, or Private
Foundations, or both, please do not hesitate to call Jim Modrall, at (231) 941-9660, or any of the attorneys
listed below.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| February 2002 CHARITABLE LEAD TRUSTS - Do They Still Make Sense? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |