charitable lead trusts

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years

Charitable Lead Trusts

Donor or heirs

Professor Russell JamesTexas Tech University

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


1. Introduction

Donor or heirs


Charitable Lead Trust

CLAT pays fixed $ annuity CLUT pays % of trust assets

Charitable Remainder

TrustCRAT pays fixed $ annuity

CRUT pays % of trust assets

Donor

Charity

Initial Transfer Anything

Left Over

Payments for Life/Years

Donor or heirs

Donor

Charity


Left Over

Payments for Life/YearsDonor or

heirs

Why do charities like Charitable Lead Trusts?

A Charitable Lead Trust locks in an immediate stream of charitable gifting without requiring continuing requests

Why would a donor use a Charitable Lead Trust?

The primary motivation for using a Charitable Lead Trust is for tax advantages, most commonly in gift and estate taxes

Charitable Lead Trusts are less common than Charitable Remainder Trusts, but usually involve larger dollar amounts

$857,297 Average size

$3,165,337 Average size

Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income

Charitable split-interest trusts by number


6%

93%

1%Charitable Lead Trusts

Charitable Remainder Trusts

Pooled Income Funds

18%

81%

1%



Pooled Income Funds

Charitable split-interest trusts by value


Charitable split-interest trusts by distributions to charity


37%

62%

1%



Pooled Income Funds

0%

10%

20%

30%

40%

50%

60%

70%

CRT

CLT

Charitable beneficiary distribution share by type

This may reflect greater CLT use of private foundations as charitable beneficiaries

Source: Split interest trusts, distributions of principal and interest combined, filing year 2011, Lisa Schreiber, IRS Statistics of Income

Donor

Charity


Left Over


Donor or heirs

CLTThe trust is not tax exempt, so the trust (non-grantor CLT) or donor (grantor CLT) must pay taxes on trust earnings

Donor

Charity


Left Over


heirs

CRTThe trust is tax exempt, so there are no immediate taxes on trust earnings

Donor

Charity


Left Over


Donor or heirs

CLTPayments may be for life or any time period and can be for any fixed dollar (CLAT) or ongoing % (CLUT) amount

Donor

Charity


Left Over


heirs

CRTPayments may be for life or up to 20 years, and must be 5% to 50% of initial (CRAT) or ongoing (CRUT) trust assets

Donor CLT (Non-Grantor)

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years

Donor’s heirs

Using non-grantor Charitable Lead Trusts to cut gift and estate taxes

Donor

Charity


Left Over


Donor’s heirs

Projected Value of

Remainder

Gift taxes are not paid on the ACTUALremainder that eventually goes to the heirs

Gift taxes are paid on the present value of the PROJECTEDremainder going to the heirs

Donor

Charity


Left Over


Donor’s heirs

Projected Value of

Remainder

If the ACTUAL amount

is higher than the

PROJECTED amount,

this part goes to heirs tax free

Donor

Charity


Left Over


Donor’s heirs

Projected Value of

Remainder

If actual growth is greater than the §7520 rate, the ACTUALremainder will be greater than projected

The PROJECTEDremainder assumes investment growth at the §7520 rate

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


1. Introduction

Donor or heirs


Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


2. Estate Tax Calculations

Donor or heirs


Gift tax on the transfer less the projected value of charity’s payments

Value ofprojected paymentsto charity

(not taxed)

Value of projected remainderto family (taxed)

What is the projected value of the payments to charity?

Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self-

Employed/Section-7520-Interest-Rates

Multiply payment by annuity factor in IRS Pub. 1457

http://www.irs.gov/Retirement-Plans/Actuarial-Tables

Value of CLAT payments

Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self-

Employed/Section-7520-Interest-Rates

Choose current or one of last

two month’s rate Section 7520 Interest Rates

Valuation Month

120% of Applicable Federal Midterm Rate

Section 7520 Interest Rate

Revenue Ruling

November 2014 2.28 2.2 Rev. Rul.

2014-28December

2014 2.06 2.0 Rev. Rul. 2014-31

January 2015 2.10 2.2 Rev. Rul.

2015-1

Nov 2.2%Dec 2.0%Jan 2.2%

$1MM/year for 11 years

CLAT on 1/31/15

Value of annuity

Find the §7520 rate

2.0%http://www.irs.gov/Businesses/Small-Businesses-&-Self-

Employed/Section-7520-Interest-Rates To get the highest annuity

valuation [lowest gift

tax] select

Dec. 2.0%

$1MM/year for 11 years CLAT on 1/31/15

Section 7520 Interest Rates

Valuation Month

120% of Applicable Federal Midterm Rate

Section 7520 Interest Rate

Revenue Ruling

November 2014 2.28 2.2 Rev. Rul.

2014-28December

2014 2.06 2.0 Rev. Rul. 2014-31

January 2015 2.10 2.2 Rev. Rul.

2015-1

Table B – Annuity interest for a Term CertainInterest at 2.0 Percent

Years Annuity Income Interest Remainder

8 7.3255 0.195737 0.853490

9 8.1622 0.211507 0.836755

10 8.9826 0.195737 0.820348

11 9.7868 0.211507 0.804263

12 10.5753 0.195737 0.788493


2.0%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-

7520-Interest-Rates

Multiply annual payment by annuity factor in IRS Pub. 1457

$1MM X 9.7868www.irs.gov/Retirement-Plans/Actuarial-Tables




7520-Interest-Rates

Multiply annual payment by annuity factor in IRS Pub. 1457

$1MM X 9.7868www.irs.gov/Retirement-Plans/Actuarial-Tables

Value of annuity

$9,786,800

If annuity pays more

than annually, add adjustment factor from

Table K


Donor

Charity


Left Over


Donor’s heirs

Projected Value of

Remainder

If actual growth is 8%,

the ACTUALremainder will be $6,670,903

Transfer $10MM to a CLAT with $1MM/year charitable annuity for 11 years ($9,786,800 value),

pay tax on $213,200 present value of PROJECTED

remainder to kids

A CLT can “zero out” gift and estate taxes by setting the non-charitable value at zero



7520-Interest-Rates

Multiply annual payment by annuity factor in IRS Pub. 1457$1,021,785 X 9.7868

www.irs.gov/Retirement-Plans/Actuarial-Tables

Value of annuity

$10,000,005

If annuity pays more

than annually, add adjustment factor from

Table K

$1,021,785/ year for 11

years CLAT on 1/31/15

Donor

Charity


Left Over


Donor’s heirs

Projected Value of

Remainder

If actual growth is 8%,

the ACTUALremainder will be $6,308,281

The PROJECTED remainder of $10MM at 2% §7520 with $1,021,785/year charitable payments for 11 years is $0, resulting in $0 gift taxation

If the charitable gift (or bequest) was already planned, the zeroed-out

CLAT (or zeroed-out testamentary

CLAT)provides a no cost chance at

tax-free transfers to

family

Choose fast growing assets to put in the non-grantor CLT

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


2. Estate Tax Calculations

Donor or heirs


Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


3. Special Trust Types

Donor or heirs


A step-CLAT increases payments to charity by a fixed percentage, paying less in early years and more in later years

Year 5$207 (+20%)

Because more assets stay in longer,

more growth can occur, leaving more for family

Year 6$249 (+20%)

Year 7$299 (+20%)

Year 8$359 (+20%)

12

Year

10

Year

9Yr8Yr7Yr6Yr5Yr4Yr3Yr2Yr1

A “shark fin” CLAT pays almost everything to charity in the last year or years

This more extreme approach has not yet received IRS approval or disapproval

Donor

Charity


Left Over

Payments for Years

Donor’s heirs

Projected Value of

Remainder

If ACTUAL length of

life is less, the ACTUALremainder will be greater than projected

If payments are for life, the PROJECTEDremainder is based on NORMAL life expectancy

The measuring life/lives must be donor, any ancestor of the remainder beneficiaries, or spouses of either.

Measuring life cannot be used “if there is at least a 50 percent probability that the individual will die within 1 year” unless person actually lives at least 18 months.


Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years

Donor’s heirs


Donor’s Private Family

Foundation

Initial Transfer

Anything Left Over

Payments for

Life/Years

Donor’s heirs

Family PF

Distributing CLAT Shares Early

IRS has approved early termination when the CLAT immediately pays all future required payments (undiscounted) to the charityPLRs 200225045, 199952093, 9844027

Issues for Generation Skipping Transfers• CLATs (not CLUTs) taxed on

projected and actual amount transferred to skip persons

• If charity can be changed, tax is recipient liability, so trust payment of tax creates more tax

Growth can also avoid taxation using a non-charitable plan (Grantor Retained

Annuity Trust), but the creator must outlive the term of the GRAT for it to work

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


3. Special Trust Types

Donor or heirs


Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


4. Income Tax Planning

Donor or heirs


I want to donate income from my assets, but I am already over the income percentage limit for deductions

Donor

(Non-Grantor) CLT taxed on income

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years Donor’s heirs

Charitable deductions to CLT withno income limitations

CLT can also pay out any income in excess of annuity or unitrust amount

Donor

Charity

Initial Transfer

Anything Left Over

Payments for Years

CLT (Grantor)

In a grantor CLT, the donor

commits to future gifts and

receives an immediate tax deduction for the present

value of these gifts

I give regularly, but I need a giant deduction to offset a big spike in income this year (e.g., due to a sale, Roth conversion, bonus, etc.)

Donor

Charity

Initial Transfer

Anything Left Over

Payments for Years or Life

CLT (Grantor)

Donor

Charity


Left Over

$10,000 Payments for 20 years

Funding $10,000/year gifts through a 20-year grantor CLAT (returning remainder to donor) creates an immediate deduction of

• $163,514 at 2% §7520 rate

• $98,181 at 8% §7520 rate

Grantor CLTs

• Donor gets a deduction

• Future income is taxed to donor

• Remainder included in donor’s estate (often returns to donor)

Non-Grantor CLTs

• Future income is taxed to trust

• Trust deducts payments to charity

• Remainder not included in donor’s estate

CLT “Defective Grantor Trust” (aka “Super Trust”)Non-Grantor CLTs

• Future income is taxed to trust

• Trust deducts payments to charity

• Remainder not included in donor’s estate

A Grantor CLT for Income Tax purposes.

A Non-Grantor CLT for Estate Tax purposes.

Grantor CLTs

• Donor gets a deduction

• Future income is taxed to donor

• Remainder included in donor’s estate (often returns to donor)

How does it work?• Estate tax and

income tax grantor trust definitions are not precisely identical

• If donor keeps a right to get trust property by substituting other property of equal value, it causes grantor treatment for income tax, but not estate tax

What kind of property can a CLT hold?

CLTs must follow same rules as private foundations

for self-dealing, taxable expenditures, jeopardizing investments, and excess business holdings

Unrelated business income (e.g., from

debt-financed property or actively

managing business) is allowed.

But in a non-grantor CLT, giving this income

to charity is deductible only at

50% (to public charity) or 30% (to

private foundation).

A GRANTOR CLT

may be a subchapter S corporation

shareholder because donor is treated as

stock owner

NON-GRANTOR CLT

should not hold subchapter S shares,

because trust is treated as the owner

(allowed only when ESBT election eliminates charitable deductions)

Subchapter S-Corp Stock

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


4. Income Tax Planning

Donor or heirs


Help me

HERE

convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise clients and you reviewed these slides, please let me know by clicking

https://ttuhumansciences.qualtrics.com/SE/?SID=SV_dj2ZHFWMKKsBWv2



All slides are taken from the

book Visual Planned Giving

Available from Amazon.com

Donor CLT

Charity

Initial Transfer

Anything Left Over

Payments for

Life/Years


Donor or heirs


charitable lead trusts

Economy & Finance