March 5, 2009
Doing Good, While Doing Well: Giving to OBU and yet Preserving Property for Your Family
One really can "do good" for the cause of Christ, for our denomination, for the students at OBU (and thereby for our world) by using a "tax-savvy" technique called a "Charitable Lead Annuity Trust" (CLAT). (A word of warning: This article will be useful only to a small group of people.)
A General Description of the Working Pattern of a CLAT:
Let us imagine that your estate is large enough that your family will pay a large percentage of it to the government in the form of estate taxes when you die. To help you deliver a larger portion of your estate to your beneficiaries, you decide to create a CLAT for a specific term of years (specialists can calculate a term which may completely avoid the estate taxes). You then contribute income-generating property to the CLAT (examples below of property which works well for this purpose). Then each year, during the term of the trust, the trust pays its current income (or a portion of it) to OBU. At maturity, the CLAT distributes the property left in it to your intended beneficiaries (usually family but they could be anyone you choose). So, during the term of the trust, OBU receives the income; at the end of the trust your family receives the original property placed in the trust (and hopefully the increased value of its appreciation) estate tax free.
For those of you who understand the concept of Charitable Remainder Trusts, the CLAT is roughly the reverse: where the CRT "spins off" income to the donor and at maturity gives the remainder of the trust to OBU, the CLAT "spins off" the income to OBU and gives the remainder to the family.
Situations Which Can Benefit From the Use of a CLAT:
If you are likely to owe federal and state estate taxes and you have a desire to promote Christian higher education (or other charities) you will benefit from this idea. The federal estate tax currently taxes the estates of individuals who have net assets of more than $2,000,000 (2009). The amount of the exemption during the next few years will change whether or not the law is changed because we are currently following a schedule of increasing exemptions but, as of "press time" we know of several proposals which may change the existing schedule. We believe that the exemption will increase from the $2,000,000 in the near future but that the estate tax will continue to be a feature of our tax structure.
Major Benefit of the CLAT to the Donor:
The major benefit to the donor is the ability to transfer large estate value to children or others (maybe grandchildren for example) with NO (or very low) estate taxes.
Major Downside of the CLAT to the Donor:
The major problem associated with the CLAT is the loss of use to the donor of the property transferred to the CLAT. This makes the type of property you hold (that you would intend to transfer to the CLAT) and the time frame of the trust length (in years) important elements for you to review in determining if this type of transaction would be useful to you in your estate planning.
Property Choice and Trust Length (in term of years):
You should choose property which produces significant income and has the prospect of significant appreciation over the CLAT's planned time span. Typical properties for this type of transaction include apartment buildings, shopping centers, rental property. Other properties which work well include investments in closely held banks or so-called "blue chip" stocks.
Why Do This Now:
What makes the current market situation so attractive: There are at least three reasons why Charitable Lead Annuity Trusts are a desirable estate transfer mechanism right now: (1) The Applicable Federal Rate (usually referred to as the "AFR" is the rate required to be used in these situations by the Internal Revenue Code) is (at the time of this writing) at 2.4%. That is at rock bottom (it has been over 6% in the not too distant past). We believe this to be the lowest rate since the inception of its use- the lower the rate the better the reduction in estate taxes. (2) Property values are currently very low. Current values are important because the taxable consequences of this CLAT to your estate will be calculated on the values as they are at the establishment of the trust. And (3) the appreciation potential over the next several years is excellent. Creating larger real value at the end of the life of the trust.
How Can OBU Help?
We understand that the people who have large estates may also be interested in many other charities- more even than their church and OBU. So if you were to approach us about how to get one of these plans started, we will understand that we may not be the only income beneficiary of your plan or even that we may not be in your plans at all. Our mission is to help develop well educated Christians at Bison Hill. That is the reason we engage in raising funds through a variety of techniques (including this one). But the fact that your plans do not immediately or directly include the students at OBU will not prevent us from offering our help to get you started in using your money to do God's Work. I know many gifted attorneys who are capable of helping you do one of these very useful tools- tools for charitable people who have large estates. So, call me- I am John Little. My office telephone is (405) 878-2718; my cell phone is (405) 760-8455; my email address is john.little@okbu.edu and my "snail-mail" address is Oklahoma Baptist University, 500 West University, Shawnee, OK 74804.