Practical analysis for investment professionals
18 November 2011

Low-Rate Environment Favors “Jackie O” Charitable Lead Trust

Jacqueline Kennedy Onassis

With interest rates at record lows, wealth managers who serve charitably minded clients in the United States may want to take a closer look at the merits of a charitable lead trust, a vehicle that is sometimes referred to as the “Jackie Onassis Trust” because the former First Lady used one as a key pillar of her estate plan — and was thus among the first to popularize it.

According to Ensemble Capital Management’s Sean Stannard-StocktonCFA, a private wealth advisor based in Burlingame, CA, who specializes in serving philanthropic families, a charitable lead trust enables the grantor — the trust creator — to move money into a vehicle that makes annual payments to charity for some period of time. At the end of the trust term, the assets either return to the grantor, or more often, are given as a gift to the grantor’s children, he explains. “The strategy here is that you are able to make gifts free of gift or estate tax, or make gifts with limited estate or gift taxes, to your children, basically in exchange for making charitable gifts out of the lead trust.”

In today’s environment, says Stannard-Stockton, charitable lead trusts “are literally as attractive as they have ever been.” That’s because the U.S. Internal Revenue Service uses a special rate — known as the Section 7520 Rate — to calculate the present value of remainder interests left by charitable trusts. The rate is published monthly and is based on the U.S. federal mid-term interest rate. For October and November the rate was just 1.4%.

“The key is that the lower the IRS discount rate, the lower the calculated remainder value of a trust,” according to The Planned Giving Company, a provider of planned giving marketing and consulting services. “In the case of charitable lead trusts, where the remainder value goes to your heirs, a lower discount rate translates into lower gift and estate taxes levied on the transfer,” says the organization.

Stannard-Stockton contends that advisors should consider using charitable lead trusts for more than just the tax planning benefits, however. Grantors can set up charitable lead trusts when a child is born, and the trust can make charitable gifts each year into a donor-advised fund. When a client’s child is old enough, Stannard-Stockton explains, he or she can be involved in determining which charities receive the money in the donor-advised fund. At the end of the trust term, the assets in the lead trust pass to the client’s heirs tax-free.

With this strategy, clients would be gifting to their children “both a pool of charitable assets for them to advise on as well as financial assets,” Stannard-Stockton says. And while a child is growing up, a client “can use the lead trust to talk to them about investments, charitable giving, and wealth transfer.”

For more information on estate-planning opportunities that result from the current status of estate taxes in the U.S. and anticipated changes in 2013, read this article in Trusts & Estates magazine.

About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

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