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| Best Practices: Matters of Trust |
To Give and Receive
Lani Luciano
06/01/2005
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Charitable Lead Annuity Trusts
Lead trusts (CLATs) have a few tax
drawbacks, but work well as an estate planning tool if you have assets you wish
to remove from your estate now, while enabling a charity and your heirs to reap
the benefits of appreciation.
These trusts are, in one sense, a mirror image
of CRATs. The charitable donation is derived not from the assets placed in
trust, but rather a stipulated income derived from those assets. The assets
belong to the trust, not the charity. As with a CRAT, the trustee, generally the
charity itself, manages the assets to generate fixed payments for a specified
period. When that period—at least 10 years, but often the donor’s lifetime—ends,
the assets are returned to the ultimate beneficiary, either the donor or, more
often, an heir or heirs.
If you, the CLAT buyer, are the ultimate
beneficiary, the trust assets remain in your taxable estate. But if you name
your heirs instead, they will likely have to pay little or no additional estate
tax when the assets revert to them. Greg Johnson, senior vice president of
the Delaware Community Foundation in Wilmington, points out that this
strategy—known as an estate freeze—is most useful when trust assets are expected
to greatly appreciate over time and are managed well enough to generate the
income to satisfy the charitable payments without being liquidated. Profitable
rental properties in growth areas or dividend-paying shares in a closely held
and prosperous family business are two prime examples of assets well suited to a
CLAT.
Commercial Annuity Plus Life Insurance
For donors drawn to the idea of
supporting charitable causes at no net cost to themselves, a growing number of
estate planners tout wealth replacement strategies that combine commercial
annuities and life insurance. David Bardes, a financial advisor in Vero Beach,
Fla., calls his method “reverse planned giving.” These bespoke plans vary
according to individual circumstances, but, as one example, Bardes cites a
70-year-old, would-be philanthropist who has used up all of his gift tax
exemptions. The hypothetical philanthropist has $4 million in municipal bonds
yielding $140,000 in tax-free annual income. He would like to liquidate his
bonds and donate $1 million to charity, leaving $3 million (minus estate
taxes) for his heirs. However, doing so would reduce his income, possibly
causing him to spend down some of his savings earmarked for
inheritance.
Bardes suggests he sell his bonds, presumably with no capital
gains due, donate $1 million of the proceeds to charity and use the remaining $3
million to purchase a lifetime annuity on the commercial insurance market. “He
can expect more than $250,000 a year in annuity payments, plus a large
income-tax deduction for the $1 million donation,” Bardes explains.
This
particular tactic will not work for everyone. To achieve painless philanthropy,
a donor must be in good health so that he can purchase life insurance, and he
needs a substantial reserve of liquid assets for emergencies. For others, Bardes
vows, “there is a strategy for every situation.”
Nor can annuities themselves
promise eternal youth and fitness, yet there is a curious statistic that neither
charities nor insurance companies mention, lest it sound like a marketing ploy.
Actuarial tables show that people with annuities live, on average, 18 months
longer than people without them. “Sorry, no magic,” the ACGA’s Mangone says.
“It’s just that they generally have better resources to take care of
themselves.”
The Waiting Game: Deferred Gift Annuities
Whereas a charitable gift annuity
(CGA) enables the purchaser to begin collecting payments right away, a
deferred gift annuity, as the name implies, gives you the option to donate now
for an immediate tax deduction, but delay payments until any specified future
date, as long as it is at least one year after the date of the contribution.
This arrangement can increase your overall tax deductions. Because the payments
begin later than with a standard CGA, you will, according to actuarial mortality
calculations, if not in fact, collect fewer payments. Thus, the charity gets to
keep more of your assets.
Lani Luciano has written for Money, Barron’s and other magazines. lmluciano1@aol.com
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