With a federal estate tax exemption at $5.49 million for 2017 and interest rates remaining near all-time lows, a charitable lead trust (or CLT) may be a particularly effective estate planning tool for some families. A helpful article from WealthManagement.com, “Planning for Qualified and Nonqualified Charitable Lead Trusts,” looks at some of the things that make planning with a CLT helpful. Especially given stock markets closing at or near record highs, there are some distinct benefits to using a charitable lead trust in your estate planning.
For clients looking to be both philanthropic and still provide heirs with assets at a reduced tax liability, a CLT could be just the thing. A CLT allows a donor to fund a trust with assets benefitting a charity at a fixed percentage of the initial gift (an annuity trust, or CLAT) or a fixed percentage of the trust amount as of December 31st of the previous year (a unitrust, or CLUT). One benefit is that the initial gift can be funded with highly-appreciated stock or other highly appreciated assets that might otherwise cause a high capital gains tax.
It’s very important when looking into this type of planning to look at the various tax repercussions. While you may avoid estate tax or gift tax, you could be opening up yourself or your heirs to other (potentially high) tax liabilities. In fact, with this type of planning, opening yourself up to a taxable gift could reduce your tax liability in the long run.
You’ll also need to consider the duration of the CLT. At the end of the term, remaining assets can be passed to heirs, but often a longer term can be better for both the charity and heirs. The IRS determines tax on the trust assets based on a combination of the length of the trust’s term, the amount of the charitable payments and Section 7520 of the tax code, often called the Section 7520 rate.
There can be some income tax advantages to planning with a CLT, too. In some cases, you could receive a charitable deduction for the full amount of the gift. However, you’ll definitely want to work with an experienced estate planning attorney and tax professional to make sure you understand the tax implications and how best to fund a CLT to get that tax benefit. However, you’ll want to be careful. You could start eating into your $5.49 million lifetime charitable exemption if you don’t plan with caution (and the good advice of your estate planning attorney and financial professionals).
This is a complex type of estate planning, and you should ensure you’re working with a sophisticated estate planning attorney. You’ll also want to coordinate with your financial and tax professionals, too, as you’ll want to understand any tax implications and what assets would be best to use to fund the trust. Also, given the uncertain political climate, you and your estate planning attorney will need to consider any changes made to tax law, as they could alter some of the effects of this type of planning.
For more information on this and other charitable planning strategies, explore our website and contact us to schedule your consultation today!
Reference: WealthManagement.com (February 2, 2015) “Planning for Qualified and Nonqualified Charitable Lead Trusts”