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After being considered an esoteric form of investment for several years, the charitable lead trust is coming back into fashion as much for its financial advantages as for its altruistic benefits.

Charitable Lead Trusts have for years been considered a key means of giving money to charity with the possibility of leaving the remainder for relatives to inherit without paying estate taxes. They have been an unpopular option in the past simply for the fact that they are, in essence, not simple; their inherent complexity has turned many people toward other alternatives.

Since the Republicans and President Obama's Administration allowed the gift- and estate-tax exemption to rise to $5 million per person for the next two years, there has been a rush among wealthy individuals to pass significant amounts of money on to heirs, free of tax. Record low interest rates have only served to further buoy this trend.

In the case of Charity Lead Trusts, the IRS has set what are referred to as hurdle or discount rates, which are tied to United States Treasury rates. A lower rate means the proportion given to charity each year may be lower, leaving a greater amount left over for heirs to inherit.

Have Charitable Lead Trusts become a Viable Option?

These trusts tend to hold the most appeal for individuals who already give annually to charity. Those who would benefit most from a Charitable Lead Trust ought to also hold a large enough income that they could take advantage of a charitable tax deduction on the entire amount put into the trust.

One thing to keep in mind when considering a Charitable Lead Trust is the current hurdle set by the IRS. For this August the rate is set at only 2.2 percent (as compared with 8.4 percent in August 1994), which means that the annual amount required to be paid out to charity is less, thereby making it more likely that there will be more money left to inherit later. In fact, analysts rate the likelihood currently of having money left for heirs at 95 percent, given the current hurdle rate.

There are, however, still risks involved in this kind of investment. If there is another significant market collapse the trust could potentially fail to pass any money on to heirs.

The biggest risks usually come from being too aggressive, such as using these trusts solely to give money to a family foundation. It could run the risk of coming under IRS scrutiny if the person who creates the foundation names his own foundation as the recipient, then solely deals money out to himself.

The best and simplest solution: name a child as the director of that portion of the foundation's giving, or limit the trust's charitable gifts in later years, so as to ensure there is money left for an inheritance.

Christopher Lee, of Lee Law Firm, understands that financial hardships can affect honest, hard-working people. His early experience growing up in a very blue collar family in a rural area of Indiana, made a significant impression on his business philosophy today. As a child, he watched his family struggle as money didn't come easy and his parent work hard to provide for their family. As a Dallas, Tx tax attorney his practice has given him the opportunity to directly impact the lives of many people.

By Christopher T Lee
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