Deferred Income or Gift Trusts: Delayed Gifts Allow Reduced Transfer Taxes
October 23, 2003
David Shayne - Chicago
A deferred income or deferred gift trust, commonly called a
charitable lead trust or CLT, pays one or more charities an annuity for a number
of years and then either returns the trust property to the donor or is
distributed to or in trust for the donor’s non-charitable beneficiaries.
A typical deferred gift trust allows a donor to pass assets
to his heirs at a much reduced transfer tax cost. By delaying the gift, we are
permitted to discount it heavily for tax purposes. If, as expected, the
investments outperform the stipulated distributions to charity, the heirs will
receive far more than the assumed value of their gifts. This is particularly
likely when current interest rates are low, as now.
During the charitable income period the donor is able to
satisfy his or her current or future charitable intentions. The annuity can go
directly to public charities or can be “banked” in a donor-advised fund or
private foundation for later distribution.
A deferred gift trust can be used to assure your family’s
continued prosperity without depriving them of the need to be productive.
Conversely, it can accelerate inheritance since it is not tied to the donor’s
death.
A deferred gift trust may also set an example of
philanthropy for your family and bring you together for charitable planning.
And some donors will enjoy an income tax savings because the annuity payments
avoid the limit on their contribution deduction.
The chart shown on this page is an example of how a
deferred income trust could benefit your family.
| Donor: Client
|
|
|
| Value of Transfer: $1,000,000
|
Transfer: CLAT |
Payout Rate: 9.00% |
| Gift Date: 3/15/2003 |
Use Discounts: No / 0.00%
|
Death Years: 2018 |
| (Client) / 2018 (Spouse)
|
Applicable Federal Rate (AFR)*:
4.0% |
Duration: Term Only |
| - Years: 14
|
Growth/Income: 0.00%, 0.00% /
98.00% |
|
*The AFR is published monthly by the IRS.
The flowchart on the previous page gives you the “big
picture” of your charitable gift. Once you have created the Lead Annuity Trust
and transferred property to it, the specified annuity amount will be paid to the
charity during the term of the trust. If the trust is a “grantor” type trust,
you will be entitled to a charitable deduction for this gift (but you will have
to report the trust’s income on your income tax return).
If the property passes to your children at the end of the
term, the current value of that “remainder interest” will be subject to gift
tax. However, that gift will be a fraction of the current market value of the
property.
At the end of the trust term, the property will pass to
your designated beneficiaries without tax. A deferred income trust creates a
very sizeable current income tax deduction, but doesn’t have a transfer tax
benefit. By various means the trust will be considered “owned” by the donor
with the result that he is deemed taxed on its income although he does not
receive it. This may be worthwhile when the donor has a large current tax
obligation and expects lower income tax and rates in the future.
For more information, e-mail David Shayne at
david.shayne@hklaw.com,
or call toll free, 1-888-688-8500.