Friday, May 8
Posted 2 p.m. EDT
A look at wealth
Since we first traded in beads and shells, the utility and power of money has been a driving force in our lives.So whether you plan on spending it, leaving it to the kids or a favorite charity, or taking it with you, our new blog will give you tidbits and observations on wealth.
I'll write about the economy, investing, taxes and society as they relate to wealth and financial planning. In the process, I hope to hear ideas and feedback from you. E-mail me at jmartel@bankrate.com.
Charity stays at home
Trusts have long been a means for the wealthy to donate a substantial amount of money to charity in a tax-efficient manner. But when times are tough, the wealthy tend to prioritize the budget by placing their own needs first, just like the rest of us.For instance, if you pay attention to a monthly rate set by the IRS, with one of the typically enticing names bestowed by the IRS -- Section 7520 -- then a charitable lead trust, or CLT, looks very attractive right now.
But the wealthy aren't going for it, say some financial planners and estate planning attorneys, primarily because they're skittish about investment losses and are hanging onto their liquidity.
In a CLT, assets are removed from the estate, which saves estate taxes. The trust is established for a set number of years, with an annuity paid to a designated charity. When the term of the trust expires, the remaining assets are passed on to the heirs. It's a nice way to seed a charity and still leave an inheritance.
Each month, the IRS sets the Section 7520 rate, sometimes called a "hurdle rate," that determines the tax on the value of the assets being placed in the trust. Since January, the rate has stayed below 3 percent. To put that in perspective, two years ago this month the rate was 5.6 percent, and in April and May of 1989, the rate was more than 11 percent.
The current low rate (2.4 percent in May) means that those who transfer assets to the CLT will enjoy that same rate for the life of the trust.
But putting assets into this type of irrevocable trust means you no longer own them -- and that is the roadblock for many of the wealthy. A feeling of uncertainty about where the bottom of the market is has put up a caution flag for spending and giving.
Lisa Schneider, a partner with the law firm Gunster Yoakley and Stewart, says, "Although a CLT makes a lot of sense for the passing of wealth to lower generations and to charity, it is a harder sell today." Instead, many clients are using their liquid assets as income, she adds, and waiting for the market to recover before committing to philanthropy.
The question is how much the charities will suffer from this reluctance. The Center on Philanthropy at Indiana University has gathered evidence from 2008 that doesn't bode well. It says the number of gifts of $1 million or more given to charities by individuals fell 33 percent in the last six months of 2008, compared to the same period in 2007.
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