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Charitable and Split-Interest Trusts

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October 2010 Presents An Even Better Time for a Charitable Lead Trust

September 22, 2010


In July, I blogged about the low interest rate environment and how that results in a great opportunity for a donor with charitable objectives who also wishes to pass assets to the next generation free of federal estate or generation-skipping transfer tax. To read that posting about Charitable Lead Trusts, click here. Well, September rates ticked downward, and, in the last few days, the IRS announced the rates available for October transfers to such trusts as ticking down even more. Therefore, what I said before goes double now. (Well, not technically double, but meaning much more.) These lower rates mean that it’s even easier for these trusts to be productive to pass even more cash to lower generations free of transfer tax. So, if you think that the trust’s investment strategy could beat the IRS-decreed rate for October of 2.0%, while also benefiting charity, October is

Charities and Life Insurance – A Growing Trend?

Life insurance has always been an important part of charitable giving.  Although there are legitimate uses, over the years the IRS has identified certain abuses regarding the use of life insurance in charitable planning.  In our practice, we have seen a recent surge in charitable planning techniques involving life insurance.  Before your charity accepts a gift of life insurance, you should consider several issues, including the following:  (1) the application of Section 170(f)(10), the so-called “charitable split-dollar rules” (which, if applicable, impose an excise tax on the charity equal to 100% of the premium payments), (2) applicable state insurable interest laws, (3) private inurement, private benefit, and excess benefit rules, (4) unrelated business income rules (and debt-financed income rules, to the extent the life insurance was acquired with borrowed funds), (5) the partial interest rules (impacting both the income and gift tax deduction of the donor), (6) I.R.C. § 4944, the jeopardizing investment rules, and I.R.C. §

“Shark-Fin” Charitable Lead Annuity Trusts

Typically, a charitable lead annuity trust ( a “CLAT”) provides for level annuity payments to the charity during the trust’s term.  For the trust to be effective in transferring value to the remainder beneficiaries, who are usually family members, the total return inside the trust must exceed the required annuity payments; otherwise, such payments will consume the entire value of the trust’s assets and no property will then pass to the remainder beneficiaries.  A “Shark-Fin” CLAT is designed so that small payments, such as $1,000 per year, are made in the early years of the trust term, with a very large payment required in the last year or two. By proceeding in that manner, fluctuations in value of trust assets in the early years become less of a factor in assuring assets will be available for distribution at the end of the term.

A CLAT may be designed as a grantor trust, providing a

August 2010 Interest Rates Indicate a Great Time for a Charitable Lead Trust (“CLT”)

The rate that the IRS uses to calculate the present value of an annuity has dropped to 2.6% for August. This is historically a very low rate, as just two years ago the rate was 4.2% and within the last decade the rate reached 8.2%. Clients are generally aware that such low rates present estate planning opportunities for vehicles such as Grantor Retained Annuity Trusts, where the ability of the trust to obtain an investment yield higher than 2.6% presents real family wealth transfer opportunities. However, clients with charitable intentions need to be aware that the same low interest rate is of substantial benefit in family wealth planning involving CLTs.

A CLT is both a family wealth transfer vehicle, as well as a charitable giving vehicle. A trust is established which pays an annuity to charity for a period of years, and at the end of that term of years,