The Highs and Lows of Rising Interest Rates

Thus, charitable lead trusts are more advantageous when the Section 7520 rate is low. For example: A $1 million charitable lead annuity trust having a 5 percent payout to a charitable beneficiary for a 10-year period with the trust terminates and pays out to the donor’s child. If the Section 7520 rate is 5.4 percent, the present value of the charity’s right to receive $500,000 ($50,000 a year for 10 years) is $378,695. If the Section 7520 rate is 3.4 percent, the present value of the charity’s interest rises to $417,935. The increase in value of the charity’s interest reduces the present value of the remainder interest that will pass to the donor’s child in 10 years and, thus, lowers the value for federal gift tax purposes. In addition, any growth in the value of the trust assets in excess of the 5 percent annuity will pass to the donor’s child.