The news this week that October’s IRS Discount Rate will drop to 1.4%, the lowest rate ever, puts downward pressure on our ability to market gift annuities and charitable remainder annuity trust gifts because of the slide in the charitable deduction available.The good news, however, is that this historic combination of the lowest discount rate with the highest gift tax exemption ($5 million, or $10 million for a couple) ever seen, means that charitable lead trusts are now among the best ways for your wealthiest donors to help you now and ensure that the maximum part of their estate passes to their heirs without taxation.Here’s how a charitable lead trust works. Your donor transfers assets (cash, stock, real estate, limited partnership interests, artwork…) into a trust for a set term (10 to 20 years are common). This removes these assets from your donor’s estate. Each year of the term, payments are made from the trust to your charity at a rate (usually between 5% and 7%) the donor fixes at the beginning. At the end of the term, the remaining trust assets pass to the heirs, usually the children of the donor. So it is the reverse of a charitable remainder trust.The importance of the discount rate (sometimes called the “hurdle”) is that the IRS uses this rate to predict how much your assets will grow in the trust and whether – after the payout to the charity and in light of the minimal estimate of growth represented in the discount rate — the trust’s assets are taxable. Investment gains beyond the “hurdle” generally pass to the heirs tax-free. With the rate at 1.4% today, this is the time for your donors to act if they think their assets will appreciate more than that during the life of the trust. Here the fact that some of your donors may have assets they think are currently undervalued also becomes an important consideration, boosting the value of the charitable lead trust in their financial planning.

In addition, the current gift tax exemption of $5 million (per individual, $10 million per couple) means that even the amount of the trust that is eligible to be taxed will only actually be taxed if it exceeds the $5 million (or $10 million for a couple) gift tax exemption. For your donors who are very wealthy and also very generous, the charitable lead trust can help them maximize the benefit of living in one of the most advantageous times ever seen for minimizing or even eliminating estate and gift taxes.

This historic rate is available beginning October 1, and can be used through the end of December 2011. A new rate will be established on November 1, also good for three months and not likely to be lower than 1.4%. The gift and estate tax exemptions (at $5 million each, per individual) are good through the end of December 2012. Many financial planners are advising their wealthy clients to use up their gift tax exemption as soon as possible.

These trusts are not for everyone. They require legal and financial help in setting up and managing and, as a result, are not usually appropriate for gifts of less than $1 million. They are irrevocable and the markets may fall further, reducing the value of the residual amount available for the heirs. But for the right donor family, they can be a terrific way to help your charity and help their children.

As you think about talking to your donors and prospects, look for people:
• Who have a high net worth, $10 million or more
• With children, who want to pass assets to those children
• Who are philanthropic and want to make a significant gift
• Who have good financial advisors who will work with them to achieve the goal of helping the charity and helping the estate.
• Finally, people who are tax averse will find the lead trust especially satisfying.

I hope you will use these tips to help a select group of your prospects “Take the lead!”

Laurel Price Jones
Senior Associate, Bentz Whaley Flessner

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