Our One Percent World

(Added 8/30/2012)

Q

The economy isn't doing really well right now, and one of the by-products is that interest rates are low. And, because of that, the charitable mid-term federal rate - the CMFR - is at an historic low of one percent. For the fall, I am preparing marketing materials pushing charitable lead trusts and want to point out that now is the best time to do a lead trust. The low interest rate will make the remainder value - the amount calculated to be the present value of what will one day go to the donors' children or other heirs - so small that the gift tax will be negligible or nothing at all. It's a win-win, no?

A

I would never want to block the path of a win-win. And of course, when you're selling something, now is always the best time. So go ahead. Parsing the language leading up to your question reveals nothing technically wrong with your desire to market lead trusts. It is a fact that the lower the CMFR - some call it the discount rate the lower the remainder, which lowers the tax burden of the donor. In a lead trust, the tax is paid when the gift is made; no taxes are due when the asset is actually transferred. And it is a fact that the discount rate is at an historic low.

On second thought, though, you might want to consider a few of the complexities in a lead trust that might not make the message so simple. A charitable lead trust is a bona-fide but complex vehicle, more so than a remainder trust, because creating one involves the future transfer of assets to non-charitable beneficiaries; also, the trust is not a tax-exempt entity. But what makes it really dicey is your connection through marketing to an implied promise that may or may not be kept. I'm not talking about the remainder value; that's set in stone. I'm talking about what actually gets transferred 20 years (or whenever) down the line. The problem with most lead trust marketing is its emphasis on the remainder. Many charities have conscientiously worked to zero out the trust the payout is so high or the duration is so long, the remainder is zero. Fine, if you like simple math. But the reality is that the discount rate is where it is for a reason. And it's not because the economy is booming. Did you ever stop to consider the possibility that when the discount rate is low that the ultimate transfer (to beneficiaries) might also be low?

A lead trust is not just a question of the remainder value. The funding asset is perhaps the biggest question. Many lead trust are funded with family businesses that are meant to be transferred intact to the next generation, and so, while there won't be much investing, the long-term viability of the enterprise, as well as excess-income and dividend potential, must be taken into account. And if the business is sold during the trust's term, the trust will pay taxes on the gain. And, for trusts investing in the marketplace, while it's true that assets can grow quite independently from the way the bond markets work the discount rate is a function of the payment obligations the United States has on its mid-term bonds - I wouldn't count on the two to be so separate that anyone should ignore the rate when predicting the trust's growth.

Look, a lead trust is a fine way to structure a gift. But it's the most complex of all planned gifts and, more than with other gifts, requires deep analysis by the donor, as well as by his or her advisor, before it should be made. The idea of getting the remainder to or near zero is only one small - and, I would suggest, misleading - component of the decision. What matters is that, upon careful examination of all the issues inherent in lead trust planning, that the donor make a gift, at least when the charity has a hand in the process, that makes sense to both charity and heirs. I would want to strike the prudent balance. It doesn't do anyone any good to push something that we know probably won't happen. Your marketing efforts need to do more than tout a zero remainder. We need to think of a lead trust - or any other gift, for that matter - as something other than a win-win.

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