SC Lawyer, May 2004, #8. Charitable lead trusts.

• Author: By Michael L.M. Jordan

South Carolina Lawyer

2004.

SC Lawyer, May 2004, #8.

Charitable lead trusts

South Carolina LawyerMay 2004Charitable lead trustsBy Michael L.M. JordanIt was reported that Jackie Onassis had an estate of approximately $25 million but that virtually no estate tax was paid at her death.

How did she do that? She did it using a charitable lead trust.

Most of us do not have clients who have the wealth of Jackie Onassis. For that matter, most attorneys do not have that kind of wealth. However, if the size of a client's estate is such that he will be facing an estate tax liability at his death, then perhaps the client should consider using a charitable lead trust as part of his estate plan.

But, proper estate planning is not just for clients. It is also for all of us in the legal profession. We should not be the proverbial cobbler who has holes in his own shoes. A charitable lead trust might just be a very good technique for all of us to use as we develop our own estate planning as well as our clients'.

What is a charitable lead trust?

A charitable lead trust is a sophisticated way of both giving an immediate gift to the charity of a donor's choice such as a church or synagogue or other charity and ultimately transferring the assets to the donor's children. The transfer to the children will often occur at a significantly reduced estate and gift tax cost.

A charitable lead trust is the opposite concept of the more familiar charitable remainder trust. With a charitable lead trust, the charitable payments happen first and the remainder interest belongs to the family.

A charitable lead trust is established by the donor transferring property, such as securities, to the trust. During the trust term, the trust provides for an annual income to be paid to the designated charity (or charities) for a certain period of time. That trust term can either be based on a person's life expectancy or on a set number of years. At the end of the charitable term, the trust terminates and distributes to the children or other family member beneficiaries.

The estate and gift tax benefit is normally the reason to use a charitable lead trust. In addition to providing for a current benefit to the charity of the donor's choice, the charitable lead trust allows the donor to leverage (i.e., use $1 of the amount protected by the tax credit to give $2 or more to the donor's children) the use of the unified estate and gift tax credit. Maximizing the amount the donor can give the donor's children is what it is all about.

How does it work?

Assume that an attorney would like to create a scholarship fund at the University of South Carolina School of Law to provide scholarships for students with financial need. That attorney decides that he would like to put $250,000 in that scholarship fund. However, the attorney also wants to benefit his children. If the attorney just gave the University of South Carolina Foundation $250,000, the donor would have funded the scholarship but would have completely prevented any of those funds from getting to his or her children. A charitable lead annuity trust offers the donor attorney another option.

Utilizing the charitable lead annuity trust, the attorney would contribute $500,000 to the trust. The trust by its trust term would provide for a five percent payout per year to the University of South Carolina Foundation for a 10-year trust term. That would be $25,000 per year or $250,000 over the 10-year funding period. At the end of the 10-year term the trust terminates and pays in equal shares to the children. The children get that remainder value. If the trust earns exactly five percent on invested assets (after tax), then the University of South Carolina Foundation gets $250,000 to create the scholarship fund for the law school and the children get the entire $500,000. And, if the trust grows in value within 10 years, all of the growth goes to the children gift tax free!

Obviously, there has been a gift to the children. The question is what is the amount of the gift for gift tax purposes? The answer demonstrates why a charitable lead trust is such a good estate planning tool. At current interest rates, the value of the remainder interest to the children is calculated to be approximately $299,000. That is the value of the gift that has to be reported as a taxable gift on a gift tax return. You would use $299,000 of the amount protected by the Unified Estate and Gift Tax Credit, but at the end of the trust term you would transfer $500,000 (or whatever is the then value of the trust) to the children. That is almost a two-to-one leverage of your tax credit.

The transaction can be even more favorable for the children. If the charitable lead trust actually earns 10 percent in each of the 10 years of its existence, then at the end of the trust term the trust will be distributing almost $900,000 to your children even though you have funded $250,000 to the charity. That is almost a five-to-one use of your unified credit to get dollars out to the children on a discounted basis.

The above example is a typical plan using a charitable lead trust. A more sophisticated concept would be to use a charitable lead trust based on the normal life expectancy of the donor, when the donor actually has a shorter than normal life expectancy. This option may be appropriate when the donor is diagnosed with a terminal illness. This technique allows the recipients to receive a significant amount of assets out of an estate for a reduced gift tax cost.

Conclusion

Neither your clients nor you have to be Jackie Onassis to use sophisticated estate planning techniques. A charitable lead trust can be a very appropriate tool if your clients want to benefit a charity today and leverage a gift to their children or other family members tomorrow. It might also be the technique you need to help your law school - and help your family at the same time. A charitable lead trust, which is a sophisticated estate planning technique, might be an appropriate technique for you to recommend to your clients for their consideration.

Michael Lee McAdams Jordan is a shareholder in the law firm of Bethea, Jordan & Griffin, P.A., specializing in estate planning, probate and taxation law.

Copyright (c) 2004 by the South Carolina Bar. All rights reserved. No part of this publication may be reproduced without written permission.