the parents' estate, any subsequent appreciation will not be subject to estate tax at their deaths. Second, because the parents can pay the trust's taxes, future estate tax liability is reduced. If the parents pay $1 in income tax, the estate tax liability is reduced by SO.50. The grantor trust's principal balance will grow at the pretax rate rather than the after-tax rate. We will soon demonstrate that, under current tax laws, a grantor trust can greatly enhance the transfer of wealth to the next generation. CHARITABLE REMAINDER TRUST (CRT) A CRT is a vehicle commonly used to diversify a low-cost-basis stock holding while making a partial gift to charity. Mr. Smith has just contributed $50 million worth of Smith Industries stock to a CRT he created. This stock had a cost basis of about zero, so we will treat it as zero in our analysis. If Mr. Smith had sold it he would have had to make an immediate capital gains tax payment of 20 percent of $30 million. Instead, Mr. Smith created the CRT, contributed the stock, and arranged for the CRT to pay him 10 annual payments of $2,800,000. At the end of the 10 years the balance of the CRT will go to a charity that Mr. Smith has designated. Mr. Smith has designated his foundation as the future recipient. The IRS requires that Mr. Smith determine the present value of this annuity and deduct it from $50 million in order to determine the amount of charitable donation Mr. Smith has made. The IRS identifies the appropriate discount rate based on the Treasury yield curve. We will assume a 6.64 percent rate. This gives the annuity a present value of $20 million. Thus, Mr. Smith can claim a charitable deduction of $30 million today even though the charity will not get any money for 10 years and the actual amount that the charity will receive is not determined. Mr. Smith will control the management of the CRT. The manager will immediately sell the Smith Industries stock and use the proceeds to build a diversified portfolio. This sale creates no direct tax liability for Mr. Smith. At the end of each of the next 10 years, Mr. Smith will receive $2,800,000. The tax characterization of this payment will be based on the "tiering of income" rules. The IRS will look at the nature of income within the CRT and attribute the most highly taxed sources, in sequence, to Mr. Smith. For example, if this year the CRT had $1,000,000 of interest income and dividends $600,000 of short-term gains $49,000,000 of long-term gains then Mr. Smith will have $1,000,000 of ordinary income and dividends $600,000 of short-term gains $1,200,000 of long-term gains $2,800,000