The IRS has just released its discount rate for July 2010, and it is 2.8% (the lowest since June of last year). The discount rate is one of the three factors that determine the charitable deduction for so-called split-interest charitable arrangements; charitable remainder annuity and unitrusts; charitable gift annuities; charitable lead trusts; pooled income funds; and gifts of a remainder interest in a person’s residence or farm. The other two factors are the size of the gift and the number of noncharitable beneficiaries.
Generally speaking, the lower the interest rate, the lower the value of the charitable deduction. But there are major exceptions.
1. Charitable Lead Trust (CLT)
You transfer assets into a CLT that will make payments to a designated charity for a period of time (or life) after which the assets in the trust are returned either to you (with a grantor lead trust) or to your beneficiaries—typically children and/or grandchildren (with a nongrantor lead trust). The latter is the far more popular of the two types.
The reason a CLT is more attractive right now is that the income- or gift-tax deduction increases as the discount rate goes down, thereby increasing the leverage the gift provides: Now you can either pass more to beneficiaries at significantly reduced transfer-tax costs with a nongrantor lead trust or generate a higher income-tax deduction with a grantor lead trust.
2. Gift of Remainder Interest in a Personal Residence or Farm
Under this arrangement, the donor makes a gift of a residence or farm and retains the right to occupy the property for life or until such time he or she wishes to move for whatever reason.
A substantial tax deduction and tax savings that free up tax dollars into spendable income without causing any disruption in the donor’s lifestyle. In addition, the donor will escape capital-gain tax consequences, if any.
Moreover, the term “personal residence” is broadly defined in the tax regulations to include any property used by the owner as a personal residence (e.g., a condominium, a vacation home, and even a boat).