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________________________________________________ Gifts The goal of any gifting plan is to remove the most value from your
estate at the least tax cost. Many estate planning techniques are
interest-rate sensitive -- the perceived benefits increase or decrease
as interest rates change. The applicable federal rate (AFR) is determined by the U.S. Treasury
each month, based on the US average market yield on outstanding
marketable obligations with remaining periods to maturity for each
of three types of terms: 1) short-term -- not more than three years,
2) mid-term -- more than three years but not more than nine years
and 3) long-term -- more than nine years. These rates may change
each month depending on what happens with market interest rates. Projecting whether the AFR will go up or down often will help you
better choose among different types of gifting programs. All planning
techniques involving annuities, interests for a term of years, interests
for life, or remainder or revisionary interests require valuations.
The valuations are based on tables that use an interest rate of
120% of the mid-term AFR for the month of the value date (or, for
valuations involving charitable contributions, for either of the
two months preceding the transfer date). For noncharitable trusts, you want the value of the gift for gift
tax purposes to be as low as possible so it will cost you less in
taxes. For charitable trusts, on the other hand, you want the value
of the gift for gift tax and income tax charitable deduction purposes
to be as high as possible so you can remove more from your estate
gift tax-free and receive a higher income tax deduction. Let's look at some estate planning ideas and see whether it would
be better for you to plan when interest rates are higher or lower. Qualified
Personal Residence Trust (QPRT) Under a QPRT, you transfer your principal residence or vacation
home into a trust for the benefit of your children or others while
retaining the sole right to use the residence for a specified term.
The value of your gift is equal to the current fair market value
of the residence less the present value of your right to use the
property during the reserved term. You use present value tables
to leverage your gift and shift all future appreciation out of your
estate. Example: You have a residence or vacation home worth $500,000.
You want to transfer it to a QPRT, retaining the right to use the
residence for a term of 10 years (with no reversion if you do not
survive).
Conclusion: QPRTs are more efficient when interest rates
are higher. Under a GRAT, you transfer property that you believe will appreciate
into a trust for the benefit of named or identified beneficiaries.
You retain a right to receive an annuity from the trust for a set
number of years. The annuity is a set percentage of the value of
the property at the time of the transfer. Again, you are leveraging
your gift and shifting future growth to your children or other beneficiaries.
The value of your gift is equal to the property's current fair market
value less the present value of your right to receive the annuity
for the trust term. Example: You transfer investment real estate worth $500,000
to a GRAT in exchange for the right to receive 8% ($40,000) per
year for 10 years.
Conclusion: GRATs are more efficient when interest rates
are lower. Under a CRAT, you transfer property into an irrevocable trust from
which a set amount is paid each year to one or more beneficiaries
(which can include you) for any term up to 20 years or over the
life or lives of one or more of the beneficiaries. The property
remaining in the trust at the end of the term passes to charity.
The value of your gift to charity (the remainder interest) for gift
tax and income tax charitable deduction purposes is equal to the
fair market value of the property at the time of transfer less the
present value of the payment rights reserved to the beneficiaries. Example: You are 51 years old and transfer securities worth
$500,000 to a CRAT in exchange for the right to receive an annuity
of 8% ($40,000) per year for your lifetime.
* Illustration purposes only because it fails the "5% test" Conclusion: CRATs are more efficient when interest rates
are higher. A CRUT is similar to a CRAT, except, instead of a set amount being
distributed, a fixed percentage of the net fair market value of
the trust property, revalued annually, is paid each year to one
or more beneficiaries (which can include the grantor). The term
of the CRUT interest may be for the life or lives of one or more
of the beneficiaries or for a fixed number of years (not to exceed
20). The remainder at the end of the term is paid to charity. The
value of your gift to charity for gift and income tax charitable
deduction purposes is equal to the present value of the remainder
interest, which will take into account the reserved term or life
interests. Incidentally, CRATs and CRUTs are tax exempt. If appreciated property
is transferred to them, the sale of the property by the trust will
not be subject to capital gains tax. The annual distributions to
the beneficiaries, however, may be subject to tax. Example: You are 51 years old and transfer securities worth
$500,000 to a CRUT in exchange for the right to receive an annuity
of 8% per year for your lifetime. The 8% is recomputed each year
based on the fair market value of the trust property. Assume one
payment is made annually and the trust is revalued one month prior
to payout.
Conclusion: CRUTs are not significantly affected by changes
in the interest rates. A CLAT is like a CRAT except the set amount paid out of the trust
each year goes to one or more charities and the trust assets remaining
at the end of the trust term go to your children or other named
beneficiaries. The value of your gift to charity for gift and income
tax charitable deduction purposes is the present value of the stream
of payments to be made to charity over the term. Example: You transfer securities worth $500,000 to a CLAT
for a 15-year term and direct that 10% ($50,000) be paid out annually
to a named charity.
Conclusion: CLATs are more efficient when interest rates
are lower. A CLUT is similar to a CLAT except, instead of a set amount being
distributed, a fixed percentage of the net fair market value of
the trust property, revalued annually, is paid each year to the
charities. The value of your gift to charity for gift and income
tax charitable deduction purposes is the present value of the stream
of payments to be made to charity over the term. Example: You transfer securities worth $500,000 to a CLUT
for a term of 20 years and direct that 10% of the annual value of
the trust be paid out each year to a named charity.
Conclusion: CLUTs are not significantly affected by changes
in the interest rates. |
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Copyright 2001 Fahlman & Olson. All rights reserved.
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