In the past, wealthy donors have been hesitant to use a Charitable Lead Trust as a tax planning option. In the past, the lifetime gift tax exclusion has been low. With a low exclusion, a Lead Trust has to be structured with a relatively high payout rate to ensure that the ultimate gift to the trust’s remainder beneficiaries (usually the donor’s family) falls below the exclusion amount. While this might have been a good theoretical planning strategy, as a practical matter the high payout rate resulted in a high risk that nothing would be left for the remainder beneficiaries. In other words, the strategy that was good in theory ended up failing in practice.
However, with the advent of TRA 2010, things are different, at least until TRA 2010 sunsets on December 31, 2012. Now, the lifetime applicable exclusion is $5 million until the sunset. So, right now there’s a window of opportunity for making a more conservatively structured Lead Trust work.
To use an example cited by Jonathan Gudema in the On Philanthropy blog, a $5 million Lead Trust, paying 3% ($150,000 a year) for 20 years creates a reportable gift of approximately $2.8 million and a credit to the donor for a $3 million charitable donation. On paper, the low payout rate works because the predicted remainder falls below the $5 million lifetime gift tax exemption. In the real world, the low payout rate increases the odds that the donor’s family will actually see something left over at the expiration of the term, usually at the donor’s death.
Under this scenario, everyone wins.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd Ste 240
San Diego, CA 92124