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Why Now Might Be the Right Time for a Charitable Lead Trust

March 19, 2015

CLT's can save the most taxes when interest rates are low.

Would you like to benefit charity but also provide for your heirs? Are you concerned about gift and estate taxes? Then a charitable lead trust (CLT) is worth considering — especially in the current economic environment. CLTs can save the most taxes when interest rates are low, as they are now.

Leading Off with Charity

A CLT first benefits charity, then family members or other loved ones. So it can be a useful tool if you want to leave a legacy for your heirs but you’re also charitably inclined.

How does it work? You fund a trust (either during your life or upon your death) and name a charity as the “lead” beneficiary and an individual as the “remainder” beneficiary. The charity will receive income from the CLT over the trust’s term. At the end of the term, whatever assets remain in the CLT will pass to the remainder beneficiary. (You can also name multiple charitable and remainder beneficiaries.)

The CLT saves taxes because the charity’s lead interest significantly reduces the remainder interest’s value for gift or estate tax purposes.

Benefit for Beneficiaries

So how do low interest rates make CLTs more powerful? When funding a CLT, you make a taxable gift equal to the initial value of the assets you contribute to the trust, less the value of the charitable interest. The charitable interest equals the total payments the charity will receive over the trust term, discounted to present value using the Section 7520 rate. The Sec. 7520 rate is set monthly by the IRS. Over the past year, it has fluctuated between 1.8% and 2.4%.

If the trust assets outperform the Sec. 7520 rate published in the month the trust was established, the difference between the value of the assets for gift and estate tax purposes and the actual value when transferred to the remainder beneficiaries will essentially pass tax-free. For example, if the applicable Sec. 7520 rate is 2% and the trust assets actually grow at a 5% rate, the assets attributable to the difference will transfer to the remainder beneficiary tax-free.

Achieving Your Goals

If you think now may be the right time for adding a CLT to your charitable giving and estate plans, please contact us. We can help you evaluate this tool to determine whether it’s the best way to achieve your goals.

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