Charitable Lead Trusts

Charitable Lead Trusts

Article posted in Charitable Lead Trust on 26 June 2003| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 16 September 2012
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Summary

In this edition of Gift Planner's Digest, Robert Lew and Darryl Ott, Esq. provide a concise overview of the variety of charitable lead trusts and provide eight creative case studies that illustrate their application.

Case Study Two: Thank You

(Intervivos, CLAT, and Non-Grantor)

Apotential donor won $4,000,000 in a personal injury lawsuit. After three years, it has become clear that the income from $3,000,000 of the settlement is more than enough for the donor's needs. The donor wants to help some of the charities that assisted him during his recovery. He establishes an intervivos $1,000,000 charitable lead annuity trust paying 5% for 20 years. The assets in the CLT will pass to his children (who will still be in their 20s) at the completion of the CLT. The charities expect to receive $1,000,000 in gifts, and the client will be able to pass the $1,000,000 plus all of the after tax appreciation on that sum to his children at a discounted value. The CLT sells assets each year equal to the amount of the annual total return realized by the CLT assets in order to have enough cash to make the lead interest payments.

What is the actual cost of the gift to both the donor and his children? Focusing on just the children, is there a better plan to provide for them? Is there a program to maximize the benefit to both the children and the charity?

Financial Results:
  No Planning Direct To Children CLAT CLAT And WRT
Gift Tax $0 $134,500 $0 $0
Other Costs $0 $0 Legal Fees Legal Fees & $134,500 1
Estate Taxes On The $1,000,000 $1,193,415 $0 $0 $0
Net To Children At End Of 20 Years $1,360,6132 $2,459,9703 $1,582,7604 $1,529,3445
Present Value Of Net To Children $683,798 $1,236,297 $795,441 $768,596
Life Insurance Proceeds $0 $0 $0 $908,600
Total $683,798 $1,236,297 $795,441 $1,677,196
Difference In PV To Children ($/%) ($552,499)(44.7%) - ($440,856)(35.7%) $440,89935.7%
Amount To Charity $0 $0 $1,000,000 $1,000,000
Total Wealth Controlled (Future Value) $1,360,613 $2,459,970 $2,582,760 $3,437,944
Difference In Total Wealth Controlled ($/%) ($1,099,357)(44.7%) - $122,7905.0% $977,97439.8%

  1. Assumes that the donor keeps the $1,000,000, which grows at an annual after tax total return of 4.8%. Then the donor dies at the end of the 20th year, and his children pay estate taxes on the value that the $1,000,000 has become as of the date of the donor's death. The estate taxes were computed using a 55% rate, and then, conservatively, the unified credit in the sum of $211,300 was added to this after tax figure.back

  2. Assumes that the children keep the $1,000,000, which grows at an annual after tax total return of 4.8%. This future value of the $1,000,000 is then reduced by the "lost opportunity cost" due to the payment of the gift taxes equal to 45% of what the future value of the growth of the gift taxes would have been if they had not been paid as of the date of the gift.back

  3. Assumes that the assets in the CLAT grow at an annual total return of 8%. Each year the sum of $50,000 is paid out of the CLAT, and the difference between the annual increase in the CLAT assets and the lead interest payment to the charities is subject to income taxes at a rate of 40%.back

  4. This figure represents the present value of a future premium outlay of $11,678 per year over a 15-year period, assuming the donor is age 45 and his health warrants a fair medical rating. Life insurance in the face amount of $908,600 is purchased in an irrevocable life insurance trust. The face amount for this life insurance is the amount that could be purchased by the present value of premiums equal to the amount of the gift taxes paid in Direct To Children.back

  5. Assumes that the assets in the CLAT grow at an annual total return of 8%. Each year the sum of $50,000 is paid out of the CLAT, and the difference between the annual increase in the CLAT assets and the lead interest payment to the charities is subject to income taxes at a rate of 40%. This figure is then reduced by the "lost opportunity cost" due to the payment of the present value of the life insurance premiums equal to 45% of what the future value of the growth of the present value of the life insurance premiums would have been if they had not been paid.back

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