The IRS released a 1.2% interest rate under IRC § 7520 for June, which determines the present value of an annuity, an interest for life or term of years, or a remainder or reversionary interest. Rev. Rul. 2013-12 tbl. 5. With interests rates at an all-time low, charitable donors are able to bequest their assets to their beneficiaries without having to worry about federal estate or generation transfer taxes by using a charitable lead trust.
Charitable lead trusts should be used to enhance charitable giving, reduce current gift taxes and estate taxes owed at death, and to transfer assets to a younger generation as part of an overall estate plan. Charitable lead trusts pay an income interest to a charity for a specified period of time with the remainder reverting to a non-charitable beneficiary. Donors who already make annual charitable gifts will find a charitable lead trust an efficient way to transfer substantial assets to family members while maintaining the donor’s regular charitable gifts.
A charitable lead trust must provide for either a guaranteed annuity interest or a unitrust interest that is payable to a charitable organization. 26 U.S.C. §§ 2055(e)(2)(B) & 2522(c)(2)(B). A guaranteed annuity payment is a payment of a certain sum established at the creation of the charitable lead trust or a fixed percentage of the value of the trust assets valued at the creation of the charitable lead trust, which is typically called a charitable lead annuity trust. A unitrust payment is a payment of a fixed percentage of the value of the trust assets as valued annually, which is usually called a charitable lead unitrust.
The charitable lead trust is a split interest trust where there is both a charitable and a noncharitable beneficiary. The charitable interest is the charity’s right to an annual distribution, while the remainder interest is the present day value of what is expected to be left over after the term of the trust has expired. If this remainder amount is passed to family members, the present value of that amount is subject to gift taxation. However, any gift tax owed can be offset by the donor’s remaining gift tax exemption amount while any appreciation of the value of the remainder during the trust term will pass free of a gift tax. Therefore, highly appreciating assets will allow the remainder beneficiary to receive a higher transfer of wealth, free of gift or estate tax, at the end of the trust term.
There has been a recent increase in interest in charitable lead trusts over the past several years due to the increase in gift and estate tax exemptions coupled with record low interest rates. With lower interest rates, the assets in the trust can be invested to beat that rate, which means the payments to the charity can be lower while the remainder left to the beneficiaries should be higher. However, many people still shy away from these trusts because they do not fully understand its abilities and benefits.
If you or someone you know has questions about a charitable lead trust or thinks they would like to set up a charitable lead trust, please do not hesitate to contact the law offices of Chepenik Trushin LLP. The experienced attorneys at Chepenik Trushin are ready, willing, and able to assist with your estate planning needs. Please feel free to contact us for an initial consultation.