Tuesday, April 7, 2020

Charitable Estate Planning Considerations

By Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group, April 7, 2020

Last month, we addressed the Federal Reserve Bank's interest rate decreases in response to COVID-19, and discussed several planning considerations, including Intra-Family Loans, Grantor Retained Annuity Trusts (GRATs) and Sale to Grantor Trusts to take advantage of the reduced interest rates.

Significant Tax Benefits Available

For individuals who are charitably inclined during this reduced interest rate environment, Charitable Lead Annuity Trusts (CLATs) are a great vehicle to consider right now for the transfer of cash or other assets. Upon creation of a Grantor CLAT, the Grantor receives a gift tax charitable deduction based on the present value of the trust’s required future distributions to the charity.
Additionally, the Grantor will receive an immediate and sizeable income tax deduction. The CLAT pays an annuity to charities that the Grantor chooses, and then, after a period of years, the principal is paid out to the Grantor’s children or grandchildren. The trust income will be taxed to the Grantor annually during the trust term.
The assets passing to the Grantor’s children or grandchildren (intended beneficiaries can be anyone, even individuals unrelated to the Grantor) are affected in part by the 7520 rate. As a result, in this reduced interest rate environment, more assets will pass to the Grantor’s intended beneficiaries. Another advantage of the CLAT is that when the assets pass to the intended beneficiaries, any appreciation on the value of the assets is free of either gift or estate taxation in the Grantor’s estate.
It may be possible to establish a CLAT that “zeros out,” so that the gift or estate tax charitable deduction will be substantially equal to the full value of the charitable income interest. Thus, if a completed gift is made of both the charitable income interest and remainder interests when the assets are transferred to the CLAT, the value of the trust is not included in the Grantor’s gross estate.
Take a look at this example: Assume that a Grantor contributes $1,000,000 to a zeroed-out Grantor CLAT when the applicable 7520 rate is 1.2%. The CLAT will pay an annuity equal to $56,530 to the charity for 20 years. The value of the charitable income tax deduction is $999,863, which equals the present value of the annuity. There is no gift or estate tax as the annuity is payable to a charity and qualifies for a charitable gift tax or estate tax deduction. At the end of the 20-year lead term, if the principal grows at an annual rate of 6%, there will be $1,127,646 remaining for the Grantor’s children or grandchildren.

Contact Us for More Details!

If you’re interested in setting up a CLAT or would like to discuss other estate planning opportunities in this reduced interest rate environment, contact Morris Law Group and schedule a consultation with one of our attorneys.

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