Donor CLT Charity Initial Transfer Anything Left Over Payments for Life/Years Charitable Lead Trusts Donor or heirs Professor Russell James Texas Tech University
Jul 02, 2015
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
Charitable Lead Trusts
1. Introduction
Donor or heirs
Professor Russell JamesTexas Tech University
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
Initial Transfer Anything
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
Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income
6%
93%
1%Charitable Lead Trusts
Charitable Remainder Trusts
Pooled Income Funds
18%
81%
1%
Charitable Lead Trusts
Charitable Remainder Trusts
Pooled Income Funds
Charitable split-interest trusts by value
Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income
Charitable split-interest trusts by distributions to charity
Source: Split interest trusts, filing year 2011, Lisa Schreiber, IRS Statistics of Income
37%
62%
1%
Charitable Lead Trusts
Charitable Remainder Trusts
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
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Initial Transfer Anything
Left Over
Payments for Life/YearsDonor or
heirs
CRTThe trust is tax exempt, so there are no immediate taxes on trust earnings
Donor
Charity
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Initial Transfer Anything
Left Over
Payments for Life/YearsDonor or
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
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Charitable Lead Trusts
1. Introduction
Donor or heirs
Professor Russell JamesTexas Tech University
Donor CLT
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Charitable Lead Trusts
2. Estate Tax Calculations
Donor or heirs
Professor Russell JamesTexas Tech University
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
Find the §7520 rate
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
$1MM/year for 11 years CLAT on 1/31/15
Find the §7520 rate
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
Value of annuity
$9,786,800
If annuity pays more
than annually, add adjustment factor from
Table K
$1MM/year for 11 years CLAT on 1/31/15
Donor
Charity
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Find the §7520 rate
2.0%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-
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
Initial Transfer Anything
Left Over
Payments for Life/Years
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
Charitable Lead Trusts
2. Estate Tax Calculations
Donor or heirs
Professor Russell JamesTexas Tech University
Donor CLT
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Charitable Lead Trusts
3. Special Trust Types
Donor or heirs
Professor Russell JamesTexas Tech University
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
Initial Transfer Anything
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.
Donor CLT (Non-Grantor)
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Donor’s heirs
Donor CLT (Non-Grantor)
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
Charitable Lead Trusts
3. Special Trust Types
Donor or heirs
Professor Russell JamesTexas Tech University
Donor CLT
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Charitable Lead Trusts
4. Income Tax Planning
Donor or heirs
Professor Russell JamesTexas Tech University
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
Initial Transfer Anything
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
Charitable Lead Trusts
4. Income Tax Planning
Donor or heirs
Professor Russell JamesTexas Tech University
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Donor CLT
Charity
Initial Transfer
Anything Left Over
Payments for
Life/Years
Charitable Lead Trusts
Donor or heirs
Professor Russell JamesTexas Tech University