Charitable Lead Trusts

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Planned Giving Boot Camp June July 2019

Wednesday, June 12, 2019 at 12:00 PM


Get Planned Giving Results Now…with a Survey Campaign!

Wednesday, July 24, 2019 at 12:00 PM


Advanced CRTs

Tuesday, August 6, 2019 at 12:00 PM


Advanced CGAs

Wednesday, August 7, 2019 at 12:00 PM


Advanced Charitable Lead Trusts

Wednesday, August 14, 2019 at 12:00 PM

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.


A Tale of Two Gifts


Right now, I am grappling with two potential complex gifts – as complex as they get.  One I am encouraging a smooth, careful approach to accepting it while the other I am pushing back against.  The question is why?

The smoothing sailing one is a gift annuity funded with real estate!  If you have ever taken my Planned Giving Boot Camp, you should know that I caution against even letting your donors know it’s an option.

So, what is different in this case?  I had one conversation with the donor and he relayed how he sincerely wanted to help the charity and cared deeply about their work, that he had done something similar already with a related charity, and that he was fine only receiving an annuity based on the net proceeds of the sale of the real estate. Oh, and he had a buyer who has purchased from him already – not bound legally but someone who has a track record with the donor.

In a ten minute phone call, all of the alerts were turned off. Donor isn’t pushing the envelope, is taking responsibility for the sale and its costs, and a clear winner in my eyes worth hundreds of thousands of dollars to my client.

Next is the one I am having trouble with.  This is for a private individual client but it is a charitable vehicle – a Shark-Fin Grantor Lead Trust funded with life insurance and an annuity.  This is as complex as they get and I should be ecstatic to be involved with this one.  Only problem is that I owe my client a duty to advise against doing anything that is likely to cause trouble with the IRS (or has good chance of being a disaster in anycase).

Firstly, what is a Shark-Fin Grantor Lead Trust funded with life insurance?  It is a lead trust (payments to charity, remainder to family) where the payments to charity are reduced during the “term” – usually the life of the donor – and where a balloon payment to charity happens when the term ends (i.e. the passing of the donor) – most of the balloon payment (from the life insurance owned by the trust) actually goes to the family as an estate tax-free gift.  This is in addition to a big upfront income tax deduction the donors take.

When all of the numbers are crunched, this is the most guaranteed “win, win” as you can find from a tax perspective!  Family gets big upfront deduction.  Annual income tax bite (Grantor trusts send all taxes on income in the trust back to the donor!) is lessened because it is based on small commercial annuity  payments to charity.  Family and charity are winners at the end.  No risks from a numbers perspective.  So, why am I being such a pain to the promoters of this plan?

Do a quick google search on Shark-Fin Lead Trusts and you might find several articles from competing attorneys and financial guys arguing whether these things work or not.  The conclusion from most of the articles is that there just isn’t enough guidance from the IRS.  That means proceed with caution.

In other words, the IRS may eventually look at these (it happens sooner or later) and decide that even though each of the steps in the deal are kosher and not nefarious, the program taken as a whole is a big tax avoidance scheme.  It works too well.

Several years ago, the IRS got wind that promoters had this deal where charities would own large insurance policies but would only be receiving around 10% of the death benefit – the other 90% would go to family tax-free!  The problem was that the donor was taking a 100% deduction for premiums paid through the charity but only giving 10% of the death benefit to charity (herein was the problem!).  Still, the promoters claimed there was nothing wrong and that the charities as owners of the policies could change beneficiaries at will.

IRS didn’t buy it and levied draconian penalties on the charities and families involved. Now, it is strictly forbidden for any charity to own life insurance policy that has any non-charitable beneficiaries. (in fact, it’s those same draconian penalties that makes us wonder if the IRS will somehow attack lead trust arrangements that own life insurance going to both family and charity)

So, with a team of high end promoters pressuring me more than I can withstand, I called the top charitable tax expert in the country (as according to me and many others). I assumed that before I even finished my first three to five words, that he would give me is usual stern warning of “stay away from this one Jonathan.” (meaning not only tell my client not to do it but also remove myself from the case altogether).

Strangely, his response was the opposite of what I expected!  He said as far as he could see, it worked.

So, I withdrew my objections and we’ll see.  Client still needs to decide to fork over a lot of $ to get this done as it requires purchasing a fully paid life insurance policy (as well as the annuity to pay the annual charitable amount). Oh, and the client will use a big law firm to draft and implement the trust (that’s our insurance policy if the deal ever goes sour!).

So, you never know – maybe I will be writing about two of the most complex gift scenarios very soon!

Everyone’s Doing These!?!

wsj 2.2.16

Planned giving in the news!  Click the picture to check out an article on funding CRUTs with appreciated art.

Ironically, the article makes it sound as if these are done often (ha, ha!  CRUTs funded with art are even rarer than Lead Trusts!).  Still, it’s a nice piece.

Actually, take a look at this chart from the article – very interesting. Notice that there are hardly any lead trusts but the total assets are high.  And, notice that CRUTs have more assets than donor advised funds!