This is the ninth in a series of 23 tax tips that AdvisorOne will publish on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).
The tax tip today comes from Benjamin Ledyard, director of Wealth Strategies and regional director of the Mid-Atlantic for Silver Bridge Advisors. During his 15 years of experience in wealth management, he has developed expertise in financial, tax, wealth transfer, risk management, investment oversight, family governance, business succession, executive benefits and philanthropic planning.Ledyard holds aJD from Widener University School of Law and a bachelor’s degree from the University of Delaware.
The Tip: Give Multiple Ways With a Charitable Lead Annuity
When advisors have clients that have charitable intent, there is a wealth transfer strategy that has a philanthropic twist: charitable lead annuity trusts (CLATs). Ledyard (left) says this technique is especially suitable for high-net-worth families who seek to achieve their philanthropic goals and at the same time transfer property free of gift and estate tax to their children. He notes that CLATs are currently also very popular among charities and foundations because of their promise of a predictable income stream over a given period of time.
CLATs are irrevocable split-interest trusts: They have a primary beneficiary, one or more charities, which receives a fixed annuity during the term of the trust, and a remainder beneficiary, often the grantor’s children, who receives all remaining assets in the trust after the lead’s interest expires at the end of the trust term.
The transfer of assets to the CLAT results in a taxable gift to the remainder beneficiaries. The amount of the taxable gift is determined by government interest rates, the Applicable Federal Rate, which was 3% for March. The lower this rate, the lower the present-value calculation, resulting in a smaller taxable gift. The donor can use the rate in effect in the month the trust is created or that in one of the previous two months. If the assets in the CLAT appreciate at a rate above the government rate during the trust term, the appreciation goes to the trust’s remainder beneficiaries free of wealth transfer taxes.
Most often, the donor will select a trust term and payout rate that will zero-out the taxable gift, with the expectation that the trust will outperform the Applicable Federal Rate. If this happens, the gift to the family will be leveraged. With each passing year, the fixed charitable annuity amount will constitute a smaller percentage of the compounding trust property, thereby amassing tax-free wealth for the donor’s heirs.
See our Tax Planning Special Report calendar for a list of future topics to be covered.