May 27, 2013

Because of the fact that interest rates have been low over recent years a lot of high net worth individuals have become interested in the possibility of creating what is called a “wait a while” trust.

These trusts can provide estate tax efficiency if your assets exceed the exclusion amount. At the current time the federal estate tax exclusion is $5.25 million. Since this is a per person exclusion a married couple has a total of $10.5 million.

It should also be noted that the estate tax exclusion is portable. This means that a surviving spouse can use the exclusion that was afforded to his or her deceased spouse. So you would still have $10.5 million to utilize this year if your spouse was to pass away.

These “wait a while” trusts are formally called testamentary non-grantor charitable lead trusts. To learn about them in detail you would do well to discuss everything with an estate planning lawyer in person because they are somewhat complicated.

However, to provide a simplified explanation the trust captures assets that you have that exceed the exclusion amount at the time of your death. You set a term during which the trust will make contributions to a charity, and you also name a non-charitable beneficiary.

The value of the trust is determined by the IRS after adding what is called the hurdle rate or discount rate to account for anticipated interest earnings. To implement this strategy you “zero out” the trust by arranging for payments to be made to the charity that equal the entirety of the projected value of the trust.

However, there will be a remainder at the conclusion of the trust term if the assets outperform the hurdle rate that was in place when the trust was created. The non-charitable beneficiaries would inherit this free of taxation.

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Ryan M. Denman and Dennis D. Duffy

Duffy Law Office, PLLC

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