Charitable Lead Trusts
Charitable Lead Trusts
How many of you remember the glamour of Jacqueline Kennedy Onassis? She was rich, beautiful, slender, stylish, savvy, and rich. Did I mention she was wealthy? You might be surprised to learn that her estate owed relatively little in estate taxes when she passed away in 1994. Her smart lawyers knew the power of charitable lead trusts.
The Mechanics
A charitable lead trust pays an annuity for a number of years to a charity selected by the client. The annual annuity payment is usually a fixed amount, but it can be recalculated annually as a set percentage of the trust’s current value. At the end of the annuity term, the rest of the money in the trust is paid to the client’s family members or other beneficiaries. The client can even direct the trustee to continue to hold the money for the benefit of those loved ones.
The Tax Treatment
The IRS allows the client to take a charitable deduction right now for the value of the future annuity payments. The IRS calculates that value based on prevailing interest rates, the amount of the payments, and the number of years the payments last. The trick is to make the trust last long enough, and to make the payments high enough, so the client can claim a big charitable deduction.
The “Zeroed Out” Trust
It is even possible to make the calculated value of the annuity equal to or higher than the amount originally placed into the trust. The entire trust is deductible, because the IRS calculates that the annuity will consume the whole investment. Even if money remains in the trust after the annuity, and even if that money passes to the client’s family members, the entire trust value is deducted on the client’s tax return. This is called a “zeroed out” trust, and it is the fondest dream of all estate planners.
The Current Environment
The current low interest rates make this technique more attractive. The annuity can be set for smaller payments over a shorter term, and still “zero out” the trust. If the investment return on the trust money can beat that lower annuity rate, the client’s family can receive a hefty inheritance in trust with zero estate tax. Under these circumstances, this is probably the most overlooked estate planning device available today.
The Disadvantage
The biggest disadvantage of this arrangement is that the family members have to wait until the charity collects its share. It is not uncommon for charitable lead trusts to continue for ten, fifteen, or even twenty years. Many of my clients have found this kind of delay unacceptable. Of course this may be just the right amount of time for the client’s children or grandchildren to reach an appropriate level of maturity before they come into a substantial inheritance.
The Bottom Line
The most important factor in considering a charitable lead trust is the client’s intent. If the client is at all inclined to make a charitable gift, this is an excellent vehicle for that purpose, and must be considered. So if you or your clients want to make the world a better place, take a tip from Jackie O, and call a smart lawyer.
J. Kevin Crain
CRAIN LAW FIRM, LLC
636-G Long Point Road #95
Mt. Pleasant, SC 29464
Phone (843) 735-7602
Fax (843) 735-7002
Email kevin@kevincrain.com
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