By: Howard L. Margolis, C.T.F.A.
Managing Director – Wealth Management, CIG Corporation, Crittenton Foundation Planned Giving Committee
Many people assume charitable giving simply involves giving money away, never to be seen again. But implementing a charitable giving program may actually help investors achieve important financial goals while saving substantially on taxes. Current market and interest rate conditions can make certain charitable gifting vehicles even more beneficial.
The global market volatility over the past few years has been painful for many investors. But coupled with the current low interest rates, this volatility has actually created a unique opportunity for some investors who create Charitable Lead Trusts (CLTs). The interest rate used to compute the value of the donation for gift tax purposes has been at or near record lows. The lower the interest rate, the lower the value of the gift (which means a lower possible gift tax liability).
Once investors transfer assets to a CLT, the designated charity receives a fixed annual payment or payout percentage from the trust for a specified term (usually 10 to 25 years) or over the lifetime(s) of the donor(s). A Charitable Lead Trust may provide either a fixed “annuity” payment or a variable “unitrust” payment to the charity or charities of one’s choice, including the Crittenton Foundation. Assets remaining at the end of the trust’s term pass to the beneficiaries designated by the investor/donor in the trust document (often the investor’s children) free of estate and gift taxes. (CLTs are not themselves exempt from income or capital gains tax).
The gifts of assets to a CLT are eligible for either an income or a gift tax charitable deduction. The gift is equal to the value of the transferred asset, minus the present value of the annual payouts to charity. The tax savings from a Charitable Lead Trust may allow you to provide significant support for the Crittenton Foundation at little or no cost to heirs in terms of ultimate inheritance. For this reason, a CLT can be particularly beneficial if its assets substantially appreciate in value during the term of the trust.
Let’s look at a recent example of a gift to a CLT: A married couple wishes to invest $1,000,000 in a Charitable Lead Annuity Trust (called a “CLAT”) in June of 2013. The trust will pay a fixed annual payment of $56,500 to the Crittenton Foundation for a period of 20 years. When the term of the trust ends, the trust assets will go to the children of the married couple. Given the low interest rate environment (the best available IRS discount rate is currently 1.2%)*, the tax deduction in our example would be $999,332.45 or a taxable gift of $667.55. Thus the married donors could provide $1,130,000 in charitable benefits through their gifting strategy and (assuming an overall investment return of 8.65% over the 20 year period) could pass an additional $1,820,755 to their family – a total benefit of $2,950,755, with no gift or estate tax.
We all have personal reasons for giving to charity, but many of us give out of a common desire to share our good fortune with others. And while the recent market environment may have impacted that good fortune, it has also created some powerful opportunities for wealth management. Talk to a professional about how implementing a charitable giving program can help you meet your financial, estate planning and philanthropic goals.
*This present value of the annuity or unitrust interest is calculated by using an interest rate (rounded to the nearest 2/10ths of 1 percent) equal to 120 percent of the Federal midterm rate in effect under IRC §1274(d)(1) for the month in which the valuation date falls and actuarial tables found in IRS Pub. 1457. As an alternative, the taxpayer may elect to use such federal midterm rate for either of the two months preceding the month in which the valuation date falls.