As the saying goes, “age may have its privileges,” but in our current environment of low interest rates, don’t even try to establish a 5% charitable remainder annuity trust (CRAT)—the lowest payout rate permitted—unless:
- The donor is at least age 76. (For a two-life trust, at least one of the income beneficiaries must be age 79, while the other can be a youthful age 78.)
- You are using the May 2020 §7520 rate of 0.8% with annual payments.
Granted, a donor establishing a charitable remainder trust can use the §7520 rate from the month of the gift or either of the two prior months, whichever is more favorable. However, even using the April 2020 rate of 1.2% only reduces the eligible ages to 75 for a one-life and 77 for two lives.
There are alternatives for charitable giving in this environment:
- Rather than a CRAT for the life or lives of the income beneficiaries, donors could use a term-of-years trust of up to 20 years. Even using the 0.8% §7520 rate, a 5% annuity trust with quarterly payments for 19 years satisfies the 10% remainder requirement. For donors in their 60s, a 19-year trust may be an attractive option. (And if the beneficiaries die within the 19-year trust term, payments can continue to other family members).
- Fund a charitable gift annuity instead of a CRAT. The recommended payout for a 65-year-old annuitant is 4.7%. For two 65-year-olds, the rate is 4.2%.
- For a donor who is not concerned with having a fixed income, the charitable remainder unitrust (CRUT) may be an attractive alternative. With low §7520 rates, the charitable deduction for a CRUT is higher than with the annuity trust. For example, assuming annual payments, a $100,000 gift, a 5% payout rate and the §7520 rate of 0.8%, an 80-year old donor would be entitled to a charitable deduction of $60,102 for a CRAT. The deduction for a CRUT would be $67,635.
Lower Rates Bring Some Good News
Some gift vehicles are more attractive when rates drop:
- A gift of a remainder interest in a home or farm is more valuable when interest rates are lower. For example, the deduction for a $100,000 parcel of vacant farmland is $87,011 for a donor age 65 using the §7520 rate of 0.8%. At a §7520 rate of 2%, the deduction would be $71,411.
- Donors who previously established charitable remainder trusts may wish to make additional gifts to charity by assigning their income interests to the remainderman. This generates an additional charitable deduction, which is calculated using the current rate. The combination of the deduction when the trust was established and the deduction for the gift of the income interest may actually exceed the amount transferred to the trust.
- In a low-interest-rate environment, the charitable lead trust is the real star. Parents hoping to transfer wealth to the next generation can reduce or even eliminate transfer taxes by establishing a non-reversionary charitable lead trust. Low interest rates enable the trust to zero out gift taxes and last for a shorter period and/or use a smaller payout.
By Kathy Sperlak, Technical Advisor
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