Think you know Charitable Lead Trusts?

lead trust pickLead Trusts are never simple – Read this carefully if you ever plan to talk to donors about lead trusts

Through an office contact, I was introduced to a “perfect” lead trust donor – a guy looking to get it done quickly, already vetted for this particular vehicle (or so he thought), all of the right factors.  As usual with “perfect” lead trust donors, I start with the basics to just see if this is really a candidate and check off the boxes to see if this is even an appropriate discussion topic for this donor:

Do you and your wife have over $20 million in assets to even be concerned with estate taxes?  Check.

Are you looking to pass assets in the future to your children? Check.

Do you have an immediate income tax need?  Check, he’s selling a business (cash sale) and getting hit with huge income taxes this year.

Charitable?  Check, has long-term ideas for giving.

So, we are talking about a Defective Grantor Lead Trust that will get both an upfront income tax deduction as well as future growth potential, and lots going to charity.

More questions:

What kind of investment for the Lead Trust itself do you have in mind?  Real estate type – LLC or LLP or REITs – good choices. Check.

What kind of payout to charity? 6% annuity over 20 years sounds good to him. Great. Check.

Last round of questions:

What charity do you have in mind?  Uh oh. Wants charitable annuity to flow to his private foundation.  It’s doable but there are some caveats.  1. IRS only allows if the grantor recuses himself from final decisions on grants of these particular funds – doable.  2. The tax deduction ceiling for any lead trust that allows any payments to any private foundation is limited to the 20% of AGI (read this point again if it is new to you as it was to me!).

Yes, this donor would be limited to 20% of his AGI in charitable income tax deductions per year for this gift.  Yikes. He was hoping to put $6 million in with a $5 million or so charitable deduction.  But, he would only get to deduct $ 1 million of that deduction this year!  He is facing over $10 million in ordinary income this year and was hoping to save much more on that end.  In any case, he suspects that he won’t have enough future income to use up all of those carryover deductions!

What if he directs all of the annuity payments to a public charity?  Does he get the 60% ceiling, which was hoping for?  Nope!  At best, he gets the 30% ceiling against his AGI! (Did you know that the income tax deduction for lead trusts is always treated as a “stock gift” for AGI ceiling purposes?  I didn’t and I teach courses on lead trusts!!!)

My last suggestion?  Look into an immediate gift to a donor advised fund for future giving and possibly half of his original intent into a lead trust.

Haven’t heard back from him.  Oh well.  This guy was as close to being a perfect defective grantor lead trust donor as you could find but the devil is in the details, as usual.


2018 Tax Reform Still a Mystery? Repeat of Tax Briefing for Fundraisers coming up!

Image result for confusion taxesStill wondering how the 2018 Tax Reform bill impacts you and/or your donors?

If you are interested in an overview of the significant changes impacting your top donors, and perhaps yourself, check out our repeat webinar presentation that is scheduled for December 10 at 12 NOON EST: 2018 TAX PLAN BRIEFING FOR DONORS AND NONPROFIT LEADERS

Over 300 people joined our webinars on this topic in January and February this year.  Lot’s of great feedback. Very practical. Designed for non-tax experts!  Cost: $75 for first location and $25 for additional locations.  Includes our draft donor friendly brochure text!


Planned Giving Boot Camp starts again October 10

Click this link Planned Giving Boot Camp to learn more about training your entire team in Planned Giving over six 1-hour webinar sessions over six week!  Or click here to register!BootCamp

Lead trust to the rescue?

Image result for lead trustsAhhhh…the graphic tells the whole story..right?  Look at the cool chart and understand how charitable lead trusts work?

Sorry, not this vehicle.

Read this short piece about an actual situation and hopefully you’ll begin to see why it’s worth learning more about lead trusts!

Recently, a client of mine had a donor looking to fund a program that needed $80,000 a year to be fully running.  The fundraisers even thought the donor was going to give $1 million to immediately endow it (they would find other funds operate it with more eventually coming from the donor’s future estate)!

But, as we know too often, the donor has the final say. So, when they met with the donor to close in on the whole gift, they were in for a surprise: donor’s advisors told him to put the $1 million into a charitable gift annuity.

Normally, a $1 million CGA is cause for celebration but not this time. What about the endowment to partially underwrite the program while the donor is still alive?

So, back to the donor they went.  Donor says no problem, I’ll just give you the CGA annuity each year to fund the program.

Sounds interesting but there’s a few problems. #1 The CGA rate for this donor is 6% – that’s $60,000 a year – short $20,000 a year to fund the program.  #2 If the donor is willing to give up the income each year to partially fund the program, why do a CGA? Just go back to the original plan and the donor gets a 100% income tax deduction with no future 1099 tax obligations (the CGA will cause taxable income with an offsetting annual deduction).

Also, this donor has no heirs and is essentially leaving the bulk of his estate to the charity.

Obviously, the donor’s advisors felt that he should hedge his bets – if need be, he could always keep the income.  So, there is bit of concern that the donor might need the income or assets in the future.

The deduction is important but not overwhelming important as the donor was willing to take the lesser CGA deduction, only around 30% of the million.

Anyway, what does this have to do with lead trusts??  No heirs to send the assets to. A CGA.

But wait.  Think about this option via a reversionary grantor lead trust we offered the donor in addition to the CGA option.

We ran a 10-year, 8% grantor lead annuity trust with remaining funds in the lead trust going back to the donor after the trust term (remember, most assets in the estate are going to the charity anyway).  (“Grantor” also means the donor gets an upfront deduction, but has to pay taxes on any income/gains incurred in the trust during the term)

Look what this option offered the donor and the charity:

  • $80,000 a year from the lead trust to fully fund the program.
  • Higher income tax deduction than the CGA (from $300k range to $400k range)
  • Donor control! The donor could trustee this himself (with help from his lawyers), meaning he could put an income producing asset in the trust like real estate which has enough income to pay the charity and upside growth potential!
  • All remaining funds/assets in the lead trust go back to the donor at the end of 10 years.

Downsides of the Lead Trust here?

  • Annual tax burden for the grantor lead trust significantly higher than the CGA (which has an offsetting annual income tax deduction for each year’s gift).
  • Much more complex gift – would require active attorney involvement throughout the trust.

Think about the possibilities?  Have you dealt with any unusual situations that could have been solved with a creative lead trust option?

Stay tuned for what actually happens (when I find out!).