Give More to Your Heirs and Less to the Government

3 October 2004

Give More to Your Heirs and Less to the Government

By James Lintott

AIf you plan to leave money in your will to the Institute for Justice (or any other charity), you should consider a planning technique that may be able to leave more for your heirs and to IJ—and reduce the amount your estate will pay in taxes.

The approach is to use a charitable lead trust (“CLT”). A CLT is a split-interest trust with a charitable beneficiary and a non-charitable beneficiary. The charitable beneficiary receives annual payments for the term of the trust. The trust can be set up to run for a specific number of years or until your death.

Here is a hypothetical description of how CLTs work: Suppose a father has $1 million (after using up all of his estate and gift tax exemption) that he wants to give to his children. Assuming he lives another 20 years, and that his assets grow at 9 percent per year, he will leave an estate worth $5.6 million. His children will get $2.7 million and the government will get $2.9 million (assuming the tax rates that the government says will be in place then). Instead, the father can set up a CLT with the million dollars, resulting in IJ getting $55,000 every year (for which the father can get a yearly tax deduction) and his children getting $2.8 million at the end of the of the 20 year period without any additional tax paid to the government. The children end up with more money even though the father has given more than $1.1 million to IJ over the 20 years. Although the example is somewhat oversimplified, it proves true the adage that the estate tax is a voluntary tax. The reasons this technique is so valuable are twofold: first, there is no income tax benefit to leaving gifts to charity in your will as opposed to making gifts while you are alive and, second, the government calculates future values at a considerably lower rate than many long-term investors can realize. The higher your returns, the more you can leave to your heirs.

Another way to think about a CLT, if you are already giving yearly donations to IJ, is to use it as a vehicle to simply leverage those gifts to give more to your children tax-free. By making those gifts within a CLT structure you can potentially avoid millions of dollars in estate taxes without any other real change in your activity other than sound planning.

A CLT is a powerful tax-planning tool that every potential estate tax payer should consider. It opens an opportunity to reduce or eliminate estate taxes, without, in many cases, requiring the donor to give up anything.

To determine if a CLT makes sense for your own situation, please consult your legal and tax advisor. If you or your advisor wants more information on a CLT, please contact Beth Stevens at IJ.

James Lintott serves as an IJ board member and is chairman of Sterling Foundation Management.