Let’s Spend Time With Lead Trusts – Pt 3

Last time, we drilled down into the charitable lead annuity trust (CLAT). We saw that

  • the CLAT may be set up to run for either a fixed term of years or an individual’s life (subject to restrictions);
  • the CLAT is used not only to fund a charitable project but also to transfer substantial assets downstream; and
  • the CLAT works especially well as a wealth-transfer mechanism in a low-interest-rate environment.

It works well in a low-interest-rate environment because in such an environment the present value of the annuity payout to charity is relatively large, which means the present value of the remainder interest given to the downstream family members is relatively small. These present values at the time the trust is created are what matter for federal gift and estate tax purposes. If the remainder value is small, the donor has made a small gift to the remainder beneficiaries. This is good, and important, if the donor is a wealthy individual who has to worry about estate and gift taxes.

It’s possible to “fine tune” a CLAT, so as to “dial down” the present value of the remainder interest and reduce the gift to the remainder beneficiaries. There are three basic ways to do this:

One is to wait to set up the CLAT until the donor believes interest rates have fallen as low as they’re going to go.

A second is to extend (make longer) the trust term; e.g., increase the term from 15 years to 20 years. This increases the present value of the annuity payout to charity, which decreases the present value of the remainder interest given to the kids or grandkids.

A third is to increase the annuity payout; e.g., from $50,000 a year to $60,000 a year. This also serves to increase the payout value and diminish the remainder value.

These three ways are like dials on a machine that dials up or down the gift and estate tax cost of transferring wealth downstream. It is possible to dial that cost down to zero with a CLAT.

More next time. Meantime, if you’re interested in exploring whether a CLAT might be suitable for one of your donors, contact your Sharpe rep.

By Jon Tidd

Read Pt 1 here
Read Pt 2 here
Read Pt 4 here
Read Pt 5 here
Read Pt 6 here

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