Is now the time for a charitable lead trust?

Families who wish to give to charity while minimizing gift and estate taxes should consider a charitable lead trust (CLT). These trusts are most effective in a low-interest-rate environment, so conditions for taking advantage of a CLT currently are favorable. Although interest rates have crept up in recent years, they remain historically low.

2 types of CLTs

A CLT provides a regular income stream to one or more charities during the trust term, after which the remaining assets pass to your children or other noncharitable beneficiaries. If your beneficiaries are in a position to wait for several years (or even decades) before receiving their inheritance, a CLT may be an attractive planning tool. That’s because the charity’s upfront interest in the trust dramatically reduces the value of your beneficiaries’ interest for gift or estate tax purposes.

There are two types of CLTs: 1) a charitable lead annuity trust (CLAT), which makes annual payments to charity equal to a fixed dollar amount or a fixed percentage of the trust assets’ initial value, and 2) a charitable lead unitrust (CLUT), which pays out a set percentage of the trust assets’ value, recalculated annually. Most people prefer CLATs because they provide a better opportunity to maximize the amount received by one’s noncharitable beneficiaries.

Typically, people establish CLATs during their lives (known as “inter vivos” CLATs) because it allows them to lock in a favorable interest rate. Another option is a testamentary CLAT, or “T-CLAT,” which is established at death by one’s will or living trust.

Another issue to consider is whether to design a CLAT as a grantor or nongrantor trust. Nongrantor CLATs are more common, primarily because the grantor avoids paying income taxes on the trust’s earnings. However, grantor CLATs also have advantages. For example, by paying income taxes, the grantor allows the trust to grow tax-free, enhancing the beneficiaries’ remainder interest.

Interest matters

Here’s why CLATs are so effective when interest rates are low: When you fund a CLAT, you make a taxable gift equal to the initial value of the assets you contribute to the trust, less the value of all charitable interests. A charity’s interest is equal to the total payments it will receive over the trust term, discounted to present value using the Section 7520 rate, a conservative interest rate set monthly by the IRS. As of this writing, the Sec. 7520 rate has fluctuated between 2.35% and 2.55% so far this year.

If trust assets outperform the applicable Sec. 7520 rate (that is, the rate published in the month the trust is established), the trust will produce wealth transfer benefits. For example, if the applicable Sec. 7520 rate is 2.5% and the trust assets actually grow at a 7% rate, your noncharitable beneficiaries will receive assets well in excess of the taxable gift you report when the trust is established.

If a CLAT appeals to you, the sooner you act, the better. In a low-interest-rate environment, outperforming the Sec. 7520 rate is relatively easy, so the prospects of transferring a significant amount of wealth tax-free are good. Contact us for more details.

© 2017


A “family bank” professionalizes intrafamily lending

If you’re interested in lending money to your children or other family members, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.

Upsides and downsides of intrafamily lending

Lending can be an effective way to provide your family financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things:

  • Documenting the loan with a promissory note,
  • Charging interest at or above the applicable federal rate,
  • Establishing a fixed repayment schedule, and
  • Ensuring that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Too often, however, people lend money to family members with little planning and regard for potential unintended consequences. Rash lending decisions can lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where the family bank comes into play.

Make loans through a family bank

A family bank is a family-owned, family-funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks are able to make financing available to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources or to lend at more favorable terms.

By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong family governance structure that promotes communication, group decision making and transparency.

Establishing clear guidelines regarding the types of loans the family bank is authorized to make — and allowing all family members to participate in the decision-making process — ensures that family members are treated fairly and avoids false expectations.

Contact us to learn more about the ins and outs of intrafamily lending.


Asset valuations and your estate plan go hand in hand

If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer.

Adequately disclosing a gift

A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:

  • Give a detailed description of the nature of the gift,
  • Explain the relationship of the parties to the transaction, and
  • Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.

Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.

IRS-imposed penalties

Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.

Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

© 2017



Life insurance and an estate plan may not always mix well

A life insurance policy can be an important part of an estate plan. The tax benefits are twofold: The policy can provide a source of wealth for your family income-tax-free, and it can supply funds to pay estate taxes and other expenses.

However, if you own your policy, rather than having, for example, an irrevocable life insurance trust (ILIT) own it, you’ll have to take extra steps to keep the policy’s proceeds out of your taxable estate.

3-year rule explained

If you already own an insurance policy on your life, you can remove it from your taxable estate by transferring it to a family member or to an ILIT. However, there’s a caveat.

If you transfer a life insurance policy and don’t survive for at least three years, the tax code requires the proceeds to be pulled back into your estate. Thus, they may be subject to estate taxes.

Fortunately, there’s an exception to the three-year rule for life insurance (or other property) you transfer as part of a “bona fide sale for adequate consideration.” For example, let’s say you wanted to transfer your policy to your daughter. You could do so without triggering the three-year rule as long as your daughter paid adequate consideration for the policy.

Determining adequate consideration isn’t an exact science. One definition is fair market value, which is essentially the price on which a willing seller and a willing buyer would agree.

Triggering the transfer-for-value rule

The problem with the bona fide sale exception is that, when life insurance is involved, it may trigger another, equally devastating, rule: the transfer-for-value rule. Under this rule, a transferee who gives valuable consideration for a life insurance policy will be subject to ordinary income taxes on the amount by which the proceeds exceed the consideration and premiums the transferee paid.

So, in the previous example, even if your daughter purchased the policy for the appropriate amount to avoid the three-year rule, she could be subject to some income tax when she receives the proceeds.

Recipe for success: Selling to a trust

It may be possible to avoid the three-year rule — without running afoul of the transfer-for-value rule — by selling an existing life insurance policy for adequate consideration to an irrevocable grantor trust. A grantor trust is a trust structured so that you, the grantor, are the owner for income tax purposes but not for estate tax purposes.

While there’s been talk of an estate tax repeal, it’s still uncertain if and when that will happen. So if your estate is large enough that estate taxes could be an issue, it’s best to continue to factor that into your planning. Please contact us if you have questions about how you should address your life insurance policy in your estate plan.

© 2017



First comes love, then comes marriage, then comes a baby… and a trip to your attorney’s office?

I had the pleasure of helping throw a baby shower for my best friend this weekend, and attended another.  I must be of a certain age, because it seems like everyone around me is welcoming a little one into the family!

With the many things to do and learn during those nine months (and the aftermath), updating your estate plan is probably not on the list. However, it should be, and here’s why:

1.  You need to choose who would take care of your child(ren) if something happened to both you and your spouse or partner.  Who would raise them and who would handle the assets you left them? Few of us at this age like to contemplate this scenario, but it could happen and your children could be at risk.  So, speak openly to each other and select who you would choose to raise your child(ren).  This can prevent family battles (how well do your in-laws get along with your family? do you think they could easily agree on who should raise your children?) and allow you to select who you both think is best.

2.  You might be surprised to learn what happens if you do not have a will:  If you have a spouse and a child, and die without a will, your spouse and child would split your probate estate (your probate estate being those assets that are not joint with right of survivorship and do not have beneficiaries named).  Would you want your three-year old to inherit one-half of these assets? If not, have a will prepared to avoid this scenario.

3.  You can control access to your child’s inheritance until a certain age:  Do you want your child(ren) to have access to an inheritance at age 18? If not, you can set up a trust to hold those assets and to be managed by a Trustee for a child’s benefit until some later time, or indefinitely.  Have a special needs child? Additional planning will be necessary.

4.  You might need life insurance: Would your spouse be able to cover the household expenses without the benefit of your income, or vice versa? It may be time to take a look at buying some life insurance, too.

5.  You can make it easier on your loved ones: How are your assets titled? How easy or difficult would it be for your spouse or partner to access or transfer your financial accounts in the case of your incapacity or death?  An estate planner can make recommendations in these regards.

6.  You can make health care decisions:  What guidance do you want to give your spouse or partner in terms of making medical decisions if you are unable?  You should have an Advance Directive for Healthcare, and should communicate openly about any wishes you might have.

These are only a few of the reasons that young families need to take their estate plan seriously.  You can truly protect your loved ones by properly addressing these issues.

CAVEAT:  This web site and the information contained herein have been prepared for educational purposes only.  The information on this blog does not constitute legal advice, which would be dependent upon the specific circumstances of a particular case.  In addition, because the law can vary from state to state some information on this site may not be applicable to you.

© Mitarart –




Remember back in December when there was all that talk about the fiscal cliff?  Since that headline was so quickly replaced with debt ceiling concerns, and followed most recently by the sequestration issues (who comes up with these terms???) you might have already forgotten about the fiscal cliff.

As esteemed Georgia State College of Law professor Samuel Donaldson put it during a recent Atlanta Estate Planning Council talk where I was a guest, we did like Wile E. Coyote, running off the cliff and hovering in the air for a few seconds.  However, unlike Wiley, we turned around and made it safely back onto the cliff before plunging to our demise (okay, maybe that is a little dramatic).

For estate planning purposes, this means that Congress implemented a permanent (that is, until Congress changes it) unified Gift and Estate Tax Exemption of $5 million for each individual, indexed for inflation.  This means that as of 2013, an individual can transfer up to $5,250,000 million during life or at death before being subject to gift or estate tax.

As I tell many clients, most of us are not lucky enough to have an estate tax problem.  For those who are, many options still exist, which may include:

1.   Use of Family Limited Partnerships and other Family-Owned Business Entities to distribute wealth

2.   Acquisition of Life Insurance (and use of Life Insurance Trusts) to cover potential estate tax liability

3.  Sales to Grantor Trusts

4.  Use of Grantor Retained Annuity Trusts

5.  Use of Credit Shelter Trusts

6.  Charitable Bequests

7.  Transferring the home to a Qualified Personal Residence Trust

8.   Making annual gifts under the Annual Exclusion amount ($14,000 in 2013)

As you can see (and although this might as well be in Greek to many) there are a number of options available to reduce the hit.  If you are lucky enough to have an estate tax problem but have not completed an estate plan, call your attorney today!

CAVEAT:  This web site and the information contained herein have been prepared for educational purposes only.  The information on this blog does not constitute legal advice, which would be dependent upon the specific circumstances of a particular case.  In addition, because the law can vary from state to state some information on this site may not be applicable to you.

Image © Valerie Potapova –