November 24, 2020

Wealth Matters: A Trust Surges, Heirs and Taxes in Mind, but Mind the Details

A feature of it that is coming back into vogue is the charitable lead trust. After parceling out specific gifts, Mrs. Onassis put the rest of her estate into one of these trusts. It was set up to last 24 years, distributing money to charity annually. Whatever is left in 2018 goes to her heirs, in this case her grandchildren.

But the resurgent interest in charitable lead trusts is as much for financial advantage as for altruism.

Since the Republicans and President Obama allowed the gift- and estate-tax exemptions to rise to $5 million per person for this year and next, there has been a rush to pass far more money than that on to heirs, free of tax. In the case of charitable lead trusts, record low interest rates are driving the trend further.

The Internal Revenue Service sets what is called a hurdle or discount rate for these trusts, which is tied to United States Treasury rates. A lower rate means the payment to charity each year can be lower, and if the assets are invested to beat that rate, the amount left over for heirs should be higher.

The confluence of these factors comes as advisers are already bombarding their wealthiest clients with ways to pass money onto heirs, with good reason: the super-rich may be living through the greatest time for avoiding estate and gift taxes in recent memory.

“What’s the biggest bang for the buck?” asked Kirk A. Hoopingarner, a partner at the law firm Quarles Brady in Chicago. “Everyone’s searching for that now. That’s why the charitable lead trust has gotten so much play.”

Banks and lawyers who reap fees from setting up these trusts are not the only ones pushing them. University development departments know the value of a steady annuity payment.

A page on Harvard University’s Web site for giving offers a primer on how these trusts benefit the university and the alumni’s heirs. Harvard also offers to handle the administration of the trust and invest the assets for the donor.

Here are some of the fundamentals of a trust that helps charities and minimizes taxes.

HOW THEY WORK Over the years, charitable lead trusts have been a way to give money to charity with the possible benefit of passing what was left to children without paying estate taxes.

What has kept people from setting these trusts up in the past — and is still causing people to hesitate — is that they are hard for someone who is not a tax lawyer to understand. “It’s too complicated for most people,” said John D. Dadakis, a partner at Holland Knight. “They’re sitting there saying, ‘I want my life simpler.’ ”

The best candidates for these trusts are people who give annually to charity and have an income large enough to take advantage of the charitable tax deduction for the entire amount put into the trust. (The federal deduction for charitable donations is capped at 50 percent of a person’s income, though it can be carried forward for five years.)

Gregory D. Singer, a wealth strategist at Bernstein Global Wealth Management in New York, said such trusts could be worthwhile for those able to put at least $1 million into them. “The downside is that money is tied up and committed,” he said. “In normal times, I’d rather remain flexible, but these aren’t normal times.”

For the super-rich, one fear is that the charitable gift deduction could go away.

THE NEW TWIST During the last period when charitable lead trusts were talked up, after Mrs. Onassis’s death in 1994, many were deemed failures. They either did not have enough money left over for heirs or, in the worst cases, they did not have enough to make all the payments to charity.

Part of the problem was the high hurdle rate — 8.4 percent in August 1994 compared with 2.2 percent for this August. (The other, of course, was the dot-com bubble burst.) A higher rate meant a larger payout and decreased the chances that there would be anything left over in the end.

Article source: http://feeds.nytimes.com/click.phdo?i=38999f0156aa9b4ff5dbb9dbcd48c734

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