Do-It-Yourself Giving
Jackie O's Secret
Having Your Cake and Your Charity, Too
When Jacqueline Kennedy Onassis’ will became public in the mid-1990s, it turned out that she had relied on a not-so-well-known way to keep her money active—a charitable lead trust. She used it so that upon her death, her money would continue to fund her favorite causes as well as permit the transfer of the bulk of her estate to her kids without triggering estate taxes.
At the time, this type of trust was something of a revelation. But charitable lead trusts are not a best-kept secret anymore. Thanks to the nation’s new surge in wealth, CLTs are starting to attract the attention of today’s nouveaux riches near and far.
It’s no wonder: CLTs allow you and your heirs to hang onto your assets while a qualified charity receives annual income for the term of the trust, whether for a certain number of years or the duration of one’s lifetime-your choice. That means you can “lend” stock, real estate, or other assets to a charity, which immediately receives gifts of income, without your having to give away any property.
Further, by the time the trust expires, your assets will have grown in value and can be passed to the next generation (or even the one after that) at a tax discount. Of course, any charity that benefits from a CLT is thrilled to be able to bank on consistent funding. “Planned gifts, including CLTs, are extraordinarily beneficial to organizations,” says Rebecca Milner, director of institutional advancement at Women for Women International, a Washington, D.C.-based group that helps women war survivors to rebuild their lives. “Once the donor and the charity come to an agreement on what the resources will be used for, CLTs provide an income stream that the organization can count on for a predictable period of time to support its programs.”
While they are increasing in popularity, CLTs haven’t gone mainstream-yet. In 2005, according to IRS filings, there were 6,100 CLTs across the country, accounting for net assets of $15.1 billion. But CLT filings are on the rise, up 35 percent since 2001. “CLTs are a hot topic as a planning technique,” says Grace Allison, tax strategist at Northern Trust. “They are phenomenal devices for leveraging exemptions for giftaxes, estate taxes, and the generation skipping tax.”
Nevertheless, CLTs require the luxury of being able to afford to lock up your assets for some period of time, forgo the income those assets could generate, and pay annual income taxes on the trust’s earned income (minus the charitable deductions). That’s hardly everyone’s cup of tea. In theory, any amount of money can establish a CLT while you tap other income to live on. In practice, CLTs tend to attract people with a healthy threshold of wealth.
So what’s driving the increased interest? In the past 10 years, the nation’s pentamillionaires have quadrupled, to nearly 1 million, according to an annual survey on wealth from Harrison Group, a market researcher. Some 2.5 percent of the population now has assets of $10 million to $20 million and have been wealthy, on average, for only about 15 years. This group is getting older, too. More and more well-heeled boomers are eyeing their legacies, using their money to make a difference and finding ways to shelter hard-earned wealth for future generations.
Also driving interest is the thorny challenge now being faced by the rising number of families with first-generation wealth: how to manage the money for the kids. “People who have worked hard for their wealth are very torn about how to pass it on,” says Alyssa Moeder, a wealth advisor at Merrill Lynch’s Private Banking & Investment Group. “The biggest question I get during estate planning is, ‘What’s the magic number? How much should I leave to the kids?’ ”
Like many trusts, of course, putting assets in a CLT can delay giving children control over money. Unlike other trusts, however, the CLT will be working for your cause in the meantime. “The issue of how much to give to the children, and when, is one of the many options to consider when setting up a charitable lead trust,” says Bill Barbeosch, chief fiduciary officer at GenSpring, a New York-based family wealth management firm. “When the CLT ends, whatever remains in the trust can be given outright to the kids or can go into a further trust for their benefit.”
What’s more, income from a CLT also can flow to a family foundation or a donor advised fund (with certain restrictions). That way, the next generation can become involved in the family’s philanthropy, learn about grant-making and gain money management skills, all without putting assets at risk.
Finally, and critically, CLTs are being seen as attractive because interest rates have been low. The lower the rates, the more potential a CLT can offer.
Setting up a CLT, by all accounts, is a complex process. The variables and decisions depend on your charitable goals, overall tax and financial picture, and whether the trust is established while you’re alive or stipulated in your will. You are well advised to tap advice from attorneys who have solid experience in the charitable arena, not just in trusts generally. (See table).
When a CLT is established, the government assumes the trust’s principal will grow based on a floating Treasury rate, the Applicable Federal Rate (AFR). Just to keep things lively, this rate changes every month. At press time, it was 5.2 percent (by contrast, it has been as high as 8 percent some years back).
You set up the trust, earmark the income that goes to charity (either a percentage of growing assets or a fixed amount), and you pay gift and estate transfer taxes on what the IRS says the principal will be worth at the end of the term-that is, the yield on the rate of return that locks in, currently 5.2 percent.
These days, of course, you might do significantly better than a 5.2 percent return. And don’t forget the magic of compounding on an annual return of 8 percent to 10 percent. The upshot: If everything goes right, your heirs get the difference. Plus, what remains in the trust — after “zeroing out” the money for the charity and the tax bite-has now moved out of your estate. You’ve already paid taxes on it. With a CLT, says Kim Baptiste, estate attorney at Schulte Roth & Zabel in New York: “You are betting you can outperform the government’s assumed rate of return.”
Given the benefits, CLTs are likely to keep multiplying over the next decade. But, as Robert Lew, a San Francisco financial planner who specializes in planned giving, points out: “CLTs don’t work without charitable intent.” If you’re looking for smart ways to give to a cause, you might want to get wise to what Jackie Kennedy Onassis did, and check out a CLT.
