For many of your clients, this may be a great time to set up a charitable lead trust (CLT). Though one of the goals of these trusts is, of course, to benefit clients' preferred charities, they can also serve as highly effective tools for dramatically reducing gift or estate tax.

The CLT technique can take many forms. Here, we'll examine some of the most basic ones for CLTs set up directly by clients and those established through their wills.

The Setup

First, let's take a closer look at CLTs' setup and analyze how the gift tax affects them. When your client establishes a CLT, he or she gifts assets to it and names a charity that will receive a fixed annuity funded for a set term. At the end of that term, any assets left in the trust are distributed to the remainder beneficiaries—typically, the client's children or trusts set up for them. (A CLT is also sometimes known as a "front trust" because the charity receives payouts before, or in front of, the remainder beneficiaries.)

If a CLT's term is long enough—or the annuity amount is great enough—the value of the gift to your client's children can be reduced substantially, no matter how much the trust's assets grow. That growth, especially when starting with current market share prices, can make a CLT an economic grand slam, as well as a tax boon.

The return rate used to determine (for tax purposes) the value of the remaining assets that would go to the children after payments to the charity end is based on current market interest rates applied to the annuity stream. Because these rates were at historic lows last month, the gift value, for tax purposes, would have been the lowest in history for any given level of annuity payment to charity.

Let's say a $1 million 20-year CLT paying a 5% annuity in January 2009, when the applicable interest rate was 2.4%, would have resulted in a gift value, for tax purposes, of $213,000. In January 2008, when the rate was 4.4%, an identical CLT-with the same annuity to charity and the same actual gift for the client's children—would have resulted in a gift value, for tax purposes, of $344,000.

For another example, assume that hypothetical client Michael O'Connor sets up a CLT and gifts $500,000 to it for a 25-year term. He designates a charity to receive annual payments of 5% of this principal, or $25,000 per year. At the end of the term, Michael's children will receive the trust assets. With professional investment management, Michael expects that these assets will amount to substantially more than the original $500,000 gift to the trust. If the assets were to grow at 7% per year from current depressed market levels, the children would receive about $1.1 million.