Charitable Planning When Interest Rates are Low
February 10, 2009
For clients with large taxable estates who are looking for creative techniques for reducing or eliminating estate taxes, consider a Charitable Lead Trust (CLT) designed to produce a transfer tax deduction equal to the amount transferred. A Charitable Lead Trust structured in this manner "zeros out" the transfer tax. In addition, a properly structured CLT will "zero out" the transfer tax cost regardless of the amount transferred to the trust. (A sample case strategy outlining this type of trust can be seen HERE.)
A key element in structuring a "zeroed out" CLT is the Applicable Federal Rate (AFR). This rate is published monthly by the IRS (also updated monthly on our IRS Discount Rates page). The AFR for March 2009 is 2.4% (the AFR for February was 2.0% and for January it was 2.4%). When a calculation is for the purpose of computing a charitable deduction, then the donor is allowed to use the AFR for the current month or either of the two preceding months. This means that February's low rate is available for CLTs that are funded by April 30, 2009.
When the AFR is low, the payout rate and trust term required to "zero out" the transfer tax can be lower. What does this mean? Now is a GREAT time for Charitable Lead Trust planning!
The table below illustrates several payout rate/trust term combinations which will produce a "zeroed out" Charitable Lead Annuity Trust:
| Trust Term | - | 2.0% AFR | 3.8% AFR | 4.0% AFR | 4.2% AFR |
|---|---|---|---|---|---|
| 10 Years | - | 11.050% | 12.037% | 12.149% | 12.261% |
| 15 Years | - | 7.725% | 8.746% | 8.863% | 8.981% |
| 20 Years | - | 6.071% | 7.128% | 7.251% | 7.375% |
| 30 Years | - | 4.432% | 5.565% | 5.699% | 5.843% |
In contrast, in September 2007, when the available AFR was 5.8%, to achieve the same zeroed out result, the following combinations were required:
| Trust Term | - | Payout Rate |
|---|---|---|
| 10 Years | - | 13.176% |
| 15 Years | - | 9.949% |
| 20 Years | - | 8.397% |
| 30 Years | - | 6.961% |
Note that when the AFR is greater than the payout rate, it is not possible to create a "zeroed out" result. Therefore, there is no trust term that will create a "zeroed out" 6% Charitable Lead Annuity Trust when the AFR is 6.2%.
The AFR has never been this low since the inception of the Section 7520 rules in 1989. Given that the potential rewards are great and the AFR changes every month, the time to act is NOW!
Call Renaissance today to learn how your clients can benefit from Charitable Lead Trust planning. The consultation is free.
