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Good-Better-Best. A year ago our Newsletter stressed the advantages of CHARITABLE LEAD TRUSTS
especially at the low interest rates in effect at the time. Since then the AFR (Applicable Federal Rate) has
dropped from 5.6% to 4.2% in January, 2003. The decline in the AFR means that the Charitable Lead Trust is
even more powerful in today’s environment as a means of satisfying both charitable intent and transfer of
assets to family members on a tax efficient basis.
In addition, today’s low stock values make a CLT particularly effective in the case of a lifetime CLT which can
be set up with high basis depreciated securities. If a wealthy taxpayer has securities at a loss, it makes the
most sense to realize those losses individually and then contribute cash. For elderly clients with enough
wealth to be concerned about estate taxes before 2010, this can be a particularly effective time to set up a
lifetime CLT to coordinate with their Trust or Will.
Special Opportunities - CHARITABLE REMAINDER TRUSTS. CRT’s are in the doghouse with low interest
rates and securities that have declined in value. The current low AFR’s mean that the charitable deduction is
lower than it would have been a year or two years ago. Besides that, many highflying stocks have fallen
precipitously.
Action Tips. For clients that have set up a CRT in their Will or Trust to be funded at death, advisors should
urge review of the Trust provisions because the tax objectives may not be achieved at these low interest rates.
For example, a client of mine has established a testamentary $1.5 million CRT to provide a lifetime income to
a relative after the client dies. At the AFR’s in effect in 2000 and before, using an AFR of 7.6%, the charitable
deduction would have been $745,000, with $755,000 in the taxable category. At today’s rates, the charitable
deduction portion drops almost $300,000 to $448,000. Of course the lifetime exemption is going up so most
clients will pay less estate tax than in 2001 and before. That does not mean that advisors and their clients
should sit back complacently with old formulas that were prepared in the high interest environment of the
1990's. Documents need to be reviewed and updated, especially in the case of clients who are elderly or in ill-
health.
Existing CRT’s. Giving the existing income interest to charity can produce a substantial charitable deduction
at today’s low interest rates and give the charity immediate access to the money. In some cases the total
charitable deductions may exceed the value of the initial gift, while the donors may have received and enjoyed
annual payments for a period of years. Consider this example. Two donors both age 65 establish a CRAT in
November, 1994, when the AFR was 9% and contribute $250,000. At today’s low rates, that income interest
for two 73 year olds would yield a charitable deduction of $255,294, more than the original contribution, which
yielded a charitable deduction of $87,686 - total charitable deduction, $342,980 PLUS annual receipts of
$17,500 for nine years or $157,500. In other words, our low interest rate environment can work to the benefit
of clients who set up CRAT’s in the 1990's, have significant income, and are tax conscious with charitable
intentions. This may be a tax angle to consider in the case of high payout CRAT’s which have declined
significantly in value. It could be a substantial benefit all the way around.
Boo-Boo’s. Do you know of any clients that set up CRT’s in the past years and haven’t taken distributions or
find that their CRT is not what they thought it was?
The IRS came up with two letter rulings in 2002 that have permitted the reformation of CRT’s where there
were mistakes of law, fact or scriveners errors (bad drafting). In both cases, the IRS recognized the
reformation or rescission of the Trust without adverse tax consequences. While letter rulings are not to be
considered precedent, practitioners do, in fact, use them as indications of IRS policy.
Bottom Line. The upshot of this discussion is that we live in a dynamic world. The current low interest rate
environment makes reviewing estate plans and charitable giving even more imperative to make sure that
client’s intentions are carried out in the most tax efficient manner possible.
©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 2003 CHARITABLE TRUSTS AND LOW INTEREST RATES 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 |