Charitable lead trusts can be used as a wealth transfer technique to avoid estate taxes while also working “especially well in a low-interest rate environment. . .”
Charitable lead trusts are typically implemented after your will, powers of attorney, and health care directives have been taken care of. Charitable lead trusts are often set up during your lifetime (inter vivos), but do not have to be and is a separate, standalone trust.
Here is an example of how a charitable lead trust may work:
Assume we have a couple with some extra money who want to benefit a charity. . .
The couple has an attorney draft a Charitable Lead Trust (CLT). The terms of the trust say that, for the lifetime of the couple (or the surviving spouse), the CLT will annually pay 5% of the trust to a qualified charity.
At the death of the surviving spouse, the money left in trust will go to (presumably) the couple’s children.
Because of the way it is set up, it is referred to as a “split-interest” gift where a portion of the gift to the trust goes to charity and a portion will ultimately go to the children.
Where do interest rates come in? The current interest rate is used to actuarially determine the amount of the gift going to the children, which the parents will use to file a gift tax return.
Of course, with limited exception, there is not actual tax assessed on a gift like that, it is just mandatory to report gifts that size to the Internal Revenue Service.
In low interest rate environments like the one we are currently in, “the calculated amount going to the children will appear to be lower, but the actual amount could be much higher, depending on the performance of the assets in the trust.”
For more information and examples of charitable lead trusts,
See Beau Ruff (Guest Contributor), Charitable lead trusts do good while reducing estate taxes, Tri-Cities Area: Journal of Business, August 2021.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
https://lawprofessors.typepad.com/trusts_estates_prof/2021/08/charitable-lead-trusts-do-good-while-reducing-estate-taxes.html