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By Genevieve M. Moore,
As estate planners, we are familiar
with advising clients about charitable gifts.
Gifts and bequests can yield valuable income, gift and estate tax
deductions to donors, and of course provide significant philanthropic
benefits. This year's historically low federal
discount rates have made certain types of gifts particularly attractive. With these rates falling even lower in
December, and with the fact that many donors consider making charitable gifts at
year end, this month presents unusual opportunities for charitable giving, particularly
when measured against the scheduled increases in gift and estate tax rates, and
possible future escalations in income tax rates on retained property.
Simple charitable gifts. Outright gifts of cash or other property
are the simplest to make, and are not affected by changes in the federal discount
rate. Significant charitable gifts made
this year could be advantageous by removing valuable property from a donor's
estate that would otherwise be subject to estate tax in subsequent years (if
not left to charity as part of the donor's estate plan). As of this writing, the estate tax is
scheduled to return in January 2011, with a maximum rate of 55% for estates in
excess of $1 million, and an additional 5% surcharge on certain estates in
excess of $10 million. Estate tax rates
and exemptions are always subject to change as a result of Congressional action;
however, as long as there is an estate tax it is axiomatic that the more your
client can comfortably give away during lifetime, the less will be subject to
estate tax upon his or her death. Also,
making a lifetime gift to charity - as opposed to a testamentary gift - can
yield valuable income tax deductions for your client. Of course, if income tax rates go up next year,
a charitable deduction might be more useful then, but this should be weighed
against itemized deduction phaseouts that will apply next year. Clients contemplating large charitable gifts
should thoroughly review the possible income tax outcomes to determine the best
timing for their gifts.
More complex charitable gifts. It
is in the area of more complex charitable gifts - "split-interest" gifts - that
the greatest opportunities for tax savings exist. Split-interest gifts are certain types of
gifts, sanctioned by the Internal Revenue Code, in which individual and
charitable beneficiaries receive successive interests in property. The most common types of split-interest gifts
are charitable remainder trusts, charitable lead trusts, gift annuities, and gifts
of remainder interests in homes and farms.
Income and gift tax deductions for the present value of these gifts are
determined using a federal discount rate (the "§7520 rate") that
fluctuates every month. The §7520 rates have reached record low levels this
autumn, and will be even lower in December.
The lower the §7520 rate, the greater the charitable benefit for
split-interest gifts in which the charity receives the upfront gift and the
"remainder" passes to individuals. That makes
charitable lead trusts particularly attractive now.
the hypothetical above to an identical CLAT established when the §7520 rate was 3.2%, as it was just one
year ago. Instead of a taxable gift of
$364,589 to the children, in December 2009, the taxable gift would have been $408,934,
and had the CLAT been funded in December 2007 when the §7520 rate was 5.0%, the taxable gift would have
been $459,481. This illustrates the
effect of fluctuations in the §7520 rate.
As §7520 rates rise, gifts
by which individuals receive the income interest and a charity receives the
"remainder" become more attractive, because the value of the deductible remainder
rises with the §7520 rate. With this
month's historic low §7520 rate and a record low 35% gift tax rate, not to
mention depressed asset values, charitable lead trusts are more appealing, but
in the right situation a charitable remainder trust also could be attractive.
Caution: Today's low §7520 rates make
it easier to run afoul of certain IRS requirements that the charitable gift be
no less than 10% of the value of the assets transferred, and that there be no
greater than a 5% probability that the trust assets will be exhausted during
the trust term. For particularly old or
young annuitants, this problem can be solved by choosing a term of years
instead of a lifetime interest for the annuitant.
Other possibilities: If a charitable trust is not a good fit
for your client, he or she might want to consider establishing a charitable gift
annuity (if offered by the charity of choice), or giving a remainder interest
in a personal residence or farm/ranch property to a charity. The latter option works particularly well if
your client already plans to leave such property to a charity upon his or her
death. Giving a remainder interest to
the charity during his or her lifetime allows your client to retain a life
estate in the property and obtain a significant income tax deduction.
Naturally these structures are complicated and require careful valuation
and tax advice, and strict adherence to the requirements set forth for
split-interest gifts. They also may
require the input of the charitable donee.
But the advantages of making such gifts this year may make the extra cost
and effort well worth the tax savings.
For two decades Genevieve Moore has represented individual
clients in the areas of estate planning and estate and trust
With respect to estate planning, Ms. Moore assists clients with their
wills and revocable "living" trusts, and advises clients on a broad
range of estate planning issues. These include personal matters
involving guardianships, health care arrangements and powers of
attorney, and tax advice with respect to gift tax, estate tax, and
generation-skipping transfer tax planning. Her work often focuses on the
most tax-efficient ways to transfer family wealth to successive
generations, through the use of family partnerships, limited liability
companies, and S corporations, and also the formation of sophisticated
trust arrangements (e.g., grantor-retained annuity trusts, and qualified
personal residence trusts). She also advises clients on techniques to
transfer real property, and on structures for carrying out their
philanthropic goals, often through the formation of charitable trusts
and private foundations. She also has expertise in educational planning.
With respect to estate and trust administration, Ms. Moore advises
executors and trustees on all aspects of the administration of a
decedent's estate and trust. This includes advice and representation in
state probate court, as well as the review of decedents' estate tax
returns. She also represents individual and institutional trustees in
trust litigation matters.
Ms. Moore received her law degree from the University of California,
Hastings College of the Law, in 1989, where she served as Senior
Managing Editor of the Hastings Constitutional Law Quarterly .
Morrison & Foerster's Trusts and Estates group
provides sophisticated planning and administration services to a broad variety
of clients. If you would like additional
information or assistance, please contact Patrick McCabe at (415) 268-6926 or
© Copyright 2010 Morrison & Foerster LLP. This article is published with permission of
Morrison & Foerster LLP. Further
duplication without the permission of Morrison & Foerster LLP is
prohibited. All rights reserved. The views expressed in this article are those
of the authors only, are intended to be general in nature, and are not
attributable to Morrison & Foerster LLP or any of its clients. The information provided herein may not be
applicable in all situations and should not be acted upon without specific
legal advice based on particular situations.
 These trusts can also be established for the
grantor's benefit, or as grantor trusts, but those options are not discussed
client can receive an income tax deduction as well this year for the charitable
gift, but only if the CLAT is a grantor trust.
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