CSQ ADVISOR
Jeffrey M. Zabner
Jeffrey M. Zabner, Westlake Village, California, is an “AV” rated (Martindale-Hubbell Peer Reviewed as Preeminent) attorney and counselor, accredited as a certified specialist in estate planning, trust and probate law (State Bar of California, Board of Legal Specialization), providing creative solutions and guidance to families, business owners, executives, trustees, and beneficiaries.
Zabner is also a contributing author of Love Money Control – Redefining Estate Planning in the 21st Century (2004, Quantum Press, Denver, CO). Co-Author, Family Limited Partnerships - a Compendium for Attorneys (1995, WES, LLC, Denver, CO). Author, Incentive Estate Planning , (1993 Personal Financial Planning, Warren Gorham & LaMont, Boston, MA). Admitted to practice law in California, Florida, and Michigan.
805.374.2777
www.zabnerlaw.com
Estate Planning and Philanthropy
Preserving Family Assets While Doing Good for Society
Encouraging those with means to devote assets to benefit society in general– and favorite causes, specifically – has long been a goal of philanthropic organizations, and it is a universal human desire to give back to society from the bounty derived through a life of industry, hard work, good fortune, and Divine Providence. Sometimes the motivation for philanthropy comes in the form of a current or future tax benefit to the donor. Even so, the result is the right one: doing good. Balanced against that goal is the drive to preserve one’s assets for the benefit of one’s family. These two objectives can be achieved in harmony through thoughtful and intelligent estate planning.
Unfortunately, it appears quite clear that the estate tax regime is coming back in January 2011 with a $1 million exemption equivalency and a top tax rate of 55%. Therefore, the tax benefits available through charitable or philanthropic components in one’s estate plan are not only desirable but may also be necessary to help preserve asset appreciation for one’s own family. There is a specific planning technique available which, in lowinterest rate environments such as ours, offers the opportunity both to do good and to derive a very valuable tax savings benefit. The planning technique is called a Charitable Lead Trust (CLT).
A CLT is a specific form of trust whereby the trustee (the person designated in the document to manage the trust) makes payments for a specified number of years to charities designated by the donor (the person creating the trust). When all the charitable payments have been made, the principal of the trust is generally distributed to the donor’s children or descendants. In other words, the charitable interests lead, and the family’s interests follow. A CLT can be created during one’s lifetime (a “Lifetime CLT”) or can be established upon one’s passing through carefully constructed provisions in a person’s will or living trust (a “Testamentary CLT”).
In the case of a Lifetime CLT, the donor creates the trust during his life and transfers assets that have appreciation potential and generate a current income stream to the trust. The donor will generally receive a current charitable income tax deduction that can be used to reduce his or her current income taxes. The deduction can generally be carried forward to future tax years until the deduction is used up.
In the case of a Testamentary CLT, the trust is created upon the death of the donor and a predetermined amount or percentage of the decedent’s gross taxable estate is invested and used to make annual charitable payments for a calculated term of years. The present value of the scheduled future payments from the CLT is calculated by the trustee, and that amount is used as a direct deduction from the value of the deceased donor’s taxable estate. When the specified term of years is over and all of the charitable payments during those years have been made, the remaining value of the trust is distributed to the deceased donor’s family, free of any estate taxes.
Let’s review an example of a Lifetime CLT and the benefits to the donors:
Bill and Mary, a married couple, have done well financially and are in the highest income and estate tax brackets. After selling his company, Bill invested $2 million in a start-up company that he founded, although he is not very active in its operation. Bill and Mary have been asked by a charity they support to contribute $180,000 per year for 20 years to help construct a new facility that will bear their name.
Without a CLT, Bill and Mary will give $180,000 per year to the charity with after-tax dollars and, in 20 years, will have contributed $3.6 million. Each year, they will deduct $180,000 from their adjusted gross income if their contributions do not exceed their annual limit on charitable deductions. Their total potential income tax savings over the 20-year period could equal $1,664,640 (assuming the Bush tax cuts are not renewed by Congress).
During this 20-year period, Bill expects the company to grow perhaps as much as 10 times its original value; their initial $2 million of company stock may someday be worth $20 million. When they die, their children will have to pay $11 million in estate taxes, and their next level of descendants (grandchildren) will have to pay 55% of what remains when their children die, leaving only $4,050,000 of the original $20 million for later generations. Almost $16 million of the original $20 million will be paid to the government in estate taxes.
Bill and Mary can achieve the same income tax savings while eliminating or greatly reducing estate and gift taxes through the use of a Lifetime CLT. They can transfer $2 million of their company’s stock to the trust. The trust agreement will require the trustee to pay $180,000 per year to their selected charities for 20 years, after which time, the assets of the trust will be distributed to their children. Since the trust pays a fixed amount to charities each year, the Internal Revenue Code will classify it as a CLT.
Using the above example, we can apply the same concept to a Testamentary CLT, except that in this instance, if Bill and Mary do not wish to give the stock away during their lives, they can create language in their wills or a living trust agreement to establish the Testamentary CLT upon the death of them both. This after-death charitable donation is a gift of a “lead interest” (a stream of payments over a period of time) rather than a lump-sum gift. The first obvious benefit of the Testamentary CLT is that it is created after one’s death so none of the donor’s assets are removed from his or her control during their lifetime. The major benefit is that after the term of years that payments are made to the charities, the remainder comes back to the donor’s family, free of estate taxes.
The use of a CLT, whether Lifetime or Testamentary, is a complex income and estate tax planning strategy that is not suitable in all planning situations; however, when it is used appropriately, both the tax and non-tax benefits derived are quite substantial. Assets are preserved for the family, and society benefits from the donor’s generosity.
