Featured Article - Charitable Lead Trust in 2012 - Same As It Ever Was... But Better! (Part 1)

Charity Advisor Resource Newsletter — Volume 3.1 (2012)

BY JONATHAN D. ACKERMAN, ESQUIRE

TRA's Increased Gift Tax Exclusion Benefit — The amendments in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA") to Code Section 2505 generally mean that – (i) each donor who has made $1 Million of gifts in prior years can still make gifts of $4.12 Million under the TRA free of federal gift tax in 2012, and (ii) each donor who has made over $5.12 Million of gifts in prior years (and correspondingly paid gift taxes on the value over $1 Million) can still make gifts of $4.12 Million under the TRA free of federal gift tax in 2012.

As a result of the reunification of the estate and gift tax regimes under the TRA, donors can have the option to exhaust their entire exclusion amount through lifetime gifting without incurring a gift tax liability. However, the timing of the gift is very important — the gift tax exclusion in 2010 was $1 Million; in 2011, it was $5 Million; in 2012, it is $5.12 Million; and for 2013 and beyond, it returns to $1 Million. Herein lies one of the most significant philanthropic planning opportunities for charitable gifts made in 2012.

The Benefit - The ability to gift up to $5.12 Million with no adverse gift tax consequence in 2012 provides some interesting planning opportunities for donors. First, any appreciation on a gifted asset after the date of the gift will transfer estate and gift tax-free. Second, to the extent the donor uses an asset subject to a valuation discount, additional value leverage can occur on the transfer. Third, donors who elect to use the $5.12 Million tax exemption in 2012 should be no worse off than those who die without having made gifts in those years. In either case, the gifts, whether made or not, will be included in the decedent's estate and subject to tax at whatever rates and exemptions are then in effect. Lastly, there is a chance that the reunification of the estate and gift tax and the $5.12 Million unified exemption amount will be permanently enacted into the law, or some type of transitional relief will be provided for donors who make gifts based upon the law as it is in 2012. The only caveat to the above discussion is the possibility of the "clawback" applying, which will be addressed in detail in an upcoming 2012 CAR Newsletter.

These rules have special application to charitable lead trusts created during 2012, and CAR Newsletter 3.2 will provide an economic analysis of the benefits of funding a CLT in 2012.

Sample CLT Forms — The IRS has published sample forms for grantor and non-grantor inter vivos and testamentary charitable lead trusts, see Revenue Procedure 2007-45 and Revenue Procedure 2007-46 (for a testamentary CLAT). Each Revenue Procedure contains significant annotations and alternate provisions for a CLT.

The CLT is a sophisticated gift planning vehicle, and as with all such vehicles, professional counsel should be retained to fully analyze the effectiveness of a particular vehicle given a particular set of circumstances.