Charitable Lead Trusts — Taking advantage of the bear market

Our current bad economy can be leveraged to save a significant amount of estate taxes by prudent use of charitable lead trusts.

This technique is described in Mike Spector, Giving Smarter While Helping Your Estate, Wall St. J., Feb. 10, 2009.  Here are some excerpts from this article:

But the deepening recession presents a rare opportunity for some people: By setting up a special trust, wealthy donors can seed favorite charities, pass money to heirs and shelter potential growth from taxes.

Under the strategy, called a “charitable lead trust,” you can transfer assets — cash, stocks and artwork among them — to a trust for a set term of years. Each year, payments are made from the trust to a designated charity or charities. After the trust’s term expires, what’s left goes to your heirs. By moving the assets out of your estate, the strategy also shelters their potential appreciation from estate taxes. * * *

What makes them especially attractive now is an historically low special rate that the Internal Revenue Service uses to predict how much your assets will grow in the trust. Estate-planning lawyers call it the “hurdle” rate because investment gains beyond it can generally pass to heirs tax-free. The rate, which is adjusted monthly, remains locked in for the length of the trust.

February’s hurdle rate is 2%, down from 4.2% a year ago. Since many assets, such as securities or businesses, are severely depressed right now, it’s likely that they’ll appreciate by a margin well beyond the 2% hurdle rate in coming years.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) and Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.