Charitable Lead Trusts can Provide Great Benefits

A Charitable Lead Trust ("CLT") is an often overlooked estate planning technique that, given the right circumstances, can be very beneficial. A CLT is a trust that provides income for a set term (or for a term of the grantor's life) to one or more charities, with the remaining principal at the end of the term passing to one or more individuals, usually the grantor's children. The grantor will be making a taxable gift to his children, but, for gift tax purposes, the value of the gift will be reduced by the value of the charitable interest. The value of the charitable interest will be determined based on the length of the term and the IRS interest rate in effect at the time of the transfer. Low IRS Interest Rates and Appreciating Assets Create CLT Opportunities

This technique can be very beneficial when two factors exist: low IRS interest rates and appreciating assets. For example, suppose a grantor ("G") transfers $1 million to a CLT, providing for a seven percent ($70,000 per year) annual payout for 20 years to a charity. At the end of the 20-year period, the trust assets will pass to G's children. For gift tax purposes, because you reduce the amount of the gift based on the charity's interest, G will have made a gift to his children valued at $170,000. This will normally not cause a gift tax, but will use up a portion of G's $650,000 unified credit exemption. The charity will receive $70,000 per year for 20 years, totaling $1.4 million. Assuming the trust grows at seven percent per year, $1 million will pass to the children and will be excluded from G's estate for estate tax purposes. However, assuming the growth is ten percent (10%) per year, the amount passing to the children will equal approximately $1.8 million. Therefore, G will have transferred $1.8 million of assets to his children at a gift tax value of only $170,000. Therefore, with the right type of assets and a low IRS interest environment, a CLT can be very advantageous.

"Annuity" CLT vs. "Unitrust" CLT

Note that there are two types of CLT's, an "annuity" trust, whereby the charity (or charities) will receive a fixed payment each year (such as the $70,000 payment described above), or a "unitrust" whereby the charity (or charities) will receive a fixed percentage of the value of the trust, as revalued each year. Assuming the assets appreciate in value, in order to transfer the most assets to the children, an annuity trust will be the best choice. These trusts can be created during lifetime, in an irrevocable trust, or at death, in a will or revocable trust. They can be a great method of passing assets to children and also providing a great benefit to your favorite charities.