Wendy hopes that Fernando will ultimately donate the assets he receives from the CLT to the charity, assuming that by then he will have sufficient wealth of his own. So she writes him a letter encouraging this, to be presented to him when the trust ends.
What to Watch For
Although CLTs can be highly beneficial to charities and clients, they can also present complications that advisors and clients must be aware of. First, gifts to these trusts don't qualify for the annual gift-tax exclusion. Second, CLTs can be subject to a variety of rules concerning self-dealing, excess business holdings and the investments of private foundations.
Also, the IRS imposes a tax on CLTs that sell or exchange real property within two years after its transfer to the trust. When this rule applies, the CLT is taxed at the client's ordinary income rate. (The intent of this provision is to prevent grantors from gaining a tax advantage by transferring property to a CLT for purposes of sale.)
Despite these potential complications, the CLT technique can be a highly effective way to meet charitable goals while benefitting children at intervals chosen with life goals in mind. Clients for whom a CLT is a good fit should strongly consider establishing one right now to take full advantage of low interest rates and position their trusts for likely asset appreciation.
Martin M. Shenkman, CPA, MBA, PFS, JD, is an estate planner in Paramus, N.J. He sponsors the Law Made Easy Press website: www.laweasy.com.