Prime time – Benefit for heirs

By Todd Cohen

Thanks to the skidding economy, low stock values and tax-law changes, gift planners are promoting an under-used charitable tool.

Typically funded with $1 million or more by donors with a net worth of roughly $10 million or more, a charitable lead annuity trust makes fixed annual payments to a charity for a term of years or until the donor dies, with the remaining assets going to the donor’s heirs, typically children.

In the expected recovery from last year’s market plunge, any gain in the value of stock put into a lead trust would benefit a donor’s heirs over the long term, says Charles Collier, senior philanthropic adviser at Harvard University.

“A down stock market allows you to transfer stock to the trust, and ultimately your children, at current value, hopefully allowing future appreciation to run out to the children,” he says.

Any estate-and-gift tax on lead-trust assets to be transferred to the donor’s heirs is fixed when the trust is created. But the “discount rate” that the government uses each month to adjust the charitable gift-tax deduction was 5.4 percent this winter, compared to 7 percent to 10 percent over the past 20 years.

“The lower the discount rate, the higher the gift-tax deduction,” says Jeff Comfort, director of planned giving at Georgetown University.

What’s more, the new tax law that took effect Jan. 1 increased the exemption on the estate-and-gift tax – known as the “unified credit” — to $1 million from $675,000 – an exemption that can be doubled for couples.

The increase gives wealthy donors another incentive to create a lead trust, Comfort says.

Financial planners typically advise wealthy clients to use up the exemption while they’re alive – often by simply giving their children a gift — so the money can “earn more for their kids during their lifetime,” he says, and so the parents can “help train their kids to manage money.”

Collier says he has been advising a 55-year-old retired investment banker who planned to fund a $2 million lead annuity trust for 15 years that would pay 9.6 percent a year to Harvard.

Based on the discount rate, his deduction would total about $2 million — making the gift tax-free.

“Even if the trust does not earn 9.6 percent and declines in value,” Collier says, “whatever amount the children get is a free gift, and the donors has made a meaningful gift to his college.”

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