Planning Your Gift
Asset Transfer Strategies
Committee on Development Meeting
December 12, 2008
In difficult times like these, we offer potential strategies to benefit from the equity market decline where the owner has every reason to believe that stock prices of sound companies will return to their highs and beyond.
The strategies depend upon current gift and estate tax law, which, as you know, changes each year through 2011. Strategy 1 may meet personal planning objectives – in planned giving we hope to "do well by doing good," while Strategy 2 may meet philanthropic as well as personal planning objectives.
In either case, the donor avoids income and capital gains taxes on the assets given to heirs or placed in trust.
Strategy 1. Use the annual gift tax exclusion ($12,000 in 2008 and $13,000 in 2009) to transfer some of the shares to heirs. If for example, XYZ stock is trading at $60, down from $100, the owner can transfer 200 shares rather than 120 shares to each heir. A husband and wife could transfer 400 shares to each heir. The market decline provides a 67% bonus in building wealth for heirs.
Strategy 2. Fund a charitable lead trust with shares of XYZ and other assets. A lead trust provides payments to Hamilton for a term of years after which the principal – and all appreciation – is transferred to heirs.
The value of the interest passing to heirs is "discounted" according to an IRS formula providing significant gift and estate tax savings. Usually, lead trusts are funded with assets expected to appreciate, using XYZ shares provides an additional 67% discount.
In addition, the present value of the remainder interest transferred to heirs decreases as interest rates decline. The IRS "Discount Rate" of 3.4% for December 2008 is near an all-time low.
Charitable lead trusts may be established during one's lifetime or by Will. While economic factors suggest establishing a lead trust now, a testamentary lead trust may put in place a plan that will accomplish personal planning and philanthropic objectives, yet allow the donor to alter the plan in response to anticipated gift and estate tax law changes.
In 2001, I mentioned these same strategies and noted that Hamilton would receive payments from a lead trust established by the Will of Esther W. Couper. At the time, Richard W. Couper '44 spoke about the benefits of planned gifts. Similar to his mother, Dick Couper was a generous outright and planned gift donor, during his lifetime and by Will, benefitting Hamilton with an outright gift and a lead trust through his estate plan.