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 Eight: I Could Have Had a V-8!

(Intervivos, CLUT, and Grantor)

Husband and wife sold $13,000,000 of stock before they became aware of the benefits of a CRT. The clients are now faced with not only unbelievable long term capital gain taxes, but they also will, most likely, pay income taxes at a higher rate because of the alternative minimum tax rules. At the suggestion of their attorney, the clients purchase $2,000,000 of 6% tax free bonds due in 11 years that they then give to an 11 year "grantor owned" charitable lead unitrust, which has a payout rate of 6%, and that has the donors' children as the remainder beneficiaries. The CLT is "defective" for federal income tax purposes so that the CLT is treated as "grantor owned," and it is "effective" for federal gift tax purposes so that the transfer of the bonds to the CLT is considered to be a completed gift to the children as of the date of the formation of the CLT. The CLT generates a first-year income tax deduction of $938,610. The taxable income of the CLT, which normally would be reported by the donors during the term of the CLT, is zero due to the tax-free nature of the income realized from the bonds. There is, of course, the normal market risk fluctuations in the value of the bonds as interest rates vary over the term of the CLT, which will only be an issue if the bonds need to be sold during the term of the CLT. However, the donors have obtained a substantial income tax deduction for the current year, and the value of the gift to their children has been reduced from $2,000,000 to $1,061,390. The clients will benefit from both an income tax deduction and a gift tax deduction from the same transfer.

Financial Results:
  No CLT - Gift To Children At End Of 11th Year No CLT - Gift To Children Now Defective CLUT
Asset Value $2,000,000 $2,000,000 $2,000,000
Income Tax Deduction $0 $0 $938,610
Amount Of Gift $3,687,1001 $2,000,000 $1,061,390
Estate Or Gift Tax $1,099,905 $280,000 $0
Net To Children At End Of 11th Year $2,587,195 $2,938,1522 $2,628,8103
Difference To Children ($/%) ($350,957)(11.9%) - ($309,342)(10.5%)
Amount To Charity $0 $0 $1,320,000
Total Wealth Controlled $2,587,195 $2,938,152 $3,948,810
Difference In Total Wealth Controlled ($/%) ($350,957) (11.9%) - $1,010,658 34.4%

  1. Includes 100% of the future value of the after tax bond interest (100%) received on the bonds in the sum of $120,000 per year for 11 years.back

  2. Assumes that the "lost opportunity cost" due to the payment of the gift taxes is 100% 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. Includes 100% of the future value of the after tax bond interest (100%) received on the bonds in the sum of $120,000 per year for 11 years.back

  3. Includes 100% of the future value of the income tax savings realized by the donors over the 11 years from the income tax deduction reported at the inception of the CLT.back

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