Chariable Lead Trust Revolution!

Apparently I missed an unbelievable revolution in the charitable lead trust arena, by about 10 years! (and so did most of the rest of the planning community)

At yesterday’s PPGGNY’s planned giving day, I heard Paul S. Lee, JD, LLM, National Managing Director of Bernstein Global Wealth Management, talk about the so-called Shark-Fin Lead Trusts.

There is no way I can do justice Lee’s presentation.  Myself, a self-proclaimed lead trust guru (having worked heavily on three lead trusts that actually came to fruition), didn’t think there was much new under the sun with these planned giving vehicles – but I was very wrong.  I am going to try and summerize in shortest form the innovations he talked about (at least the ones I grasped) and give you a link to a recent paper Paul wrote on the topic (for the die-hard planners out there).

Firstly, if you are not sure about lead trusts in general, read this piece:  Understanding Charitable Lead Trusts (this is my own primer on the topic).  If you don’t have patience for my comments, here is Paul Lee’s article on the so-called Shark-Fin Lead Trust:  BNA_TM_SharkFinClats_1210  Here is another more recent outline:  PSL CLAT Outline (Jun 2011)

So, what did I learn new?

Number 1:  It is totally fine and standard to create a lead trust with laddered payments to charity.  In other words, you can create a lead trust in which payments start at $100K in the first year, jump to $120K in year 2, and keep jumping (any pattern should work even though using 20% incremental jumps has a greater history and is a bit more “standard” than more extreme patterns – as you will see).

Why is this important?  Paul showed us a very important chart regarding lead trust investments.  Guys like me always make projections with flat returns during the term of a trust (I know it is unrealistic but it is the simplest way for me to see generally what might happen with a trust).  In truth, investments in the stock market fluxuate (and yes, over time, you will get that nice average 9% return so says every decent investment presenter I have seen). With lead trusts, typical market fluxations could help or destroy your lead trust. If you start off your lead annuity trust with one or more of the bad investment years (that do happen), your trust might lose too much principal in its early years to catch up during the good investment years (which also happen but maybe too late).  Laddering payments to charity (smaller payments in early years) gives the lead trust much greater chances to succeed by giving your lead trust investments time to catch good investment years in the early years of the trust, which then can carry the trust through good and bad years until the end.

Paul used an amazing example of how this concept works.  He took the last 10 years of returns from the S & P 500 and used them as the investment results of an imaginary lead trust.  The average return over the time period was over 9% – great for lead trust success, right?  Not necessarily.   One column used the S & P 500 returns as they actually occurred and the result was good – money to charity and left overs for children.  The next column, he inverted the annual returns using the most recent years as the early years of the lead trust and guess what?  The trust failed – exhausted its assets.

And, this technique is not bad for charities.  Even if the charity gets less upfront, the present valuing of the income stream of a laddered lead trust requires more money to actually to go to the charity (albeit delayed).

Number 2: Paul humorously recounted how he ignored an email in 2007 announcing that the IRS had issued template Charitable Lead Trust forms.  I also ignored that piece of news – why would an attorney use the IRS’s typical not so great forms.  Well, contained within that 2007 lead trust Rev. Proc. (Revenue Procedure announcement) was a clear statement from the IRS that the income stream to charities under lead trusts needed only to be ascertainable.  In other words, lawyers had been using the GRAT model of 20% increases in annuity payments – not even 100% sure the GRAT rules applied to lead trusts.  Now, this Rev. Proc. says that there is no maximum annual increases like GRATs, rather, just as long as you can calculate the present value of the income stream to charity.  In other words, the Shark-Fin Lead Trust.

The Shark-Fin – I have no idea why that silly name.  How about naming it the Push-The-Envelope Lead Trust.  What is it?  Example: $1,000 a year for 19 years to charity and a balloon payment of $20 million in the last year.

Ok, Paul described some wild reasons why this might work.  But, also described why it didn’t work.  I wish I could write for hours on the whys – I just don’t have the time and Paul himself wrote the article if you want details.  Here is the link again:  BNA_TM_SharkFinClats_1210

Third big piece of news:  under Paul’s illustrations, he made a very strong argument that a lead trust is actually a better estate planning vehicle (especially the charitably minded but not necessarily) today than the other standards (GRATs, etc..).  A very bold statement since I always start with the premise that you will be better off, dollar for dollar (if your goal is strictly money in your hands and that of your heirs), with non-charitable vehicles.  He had a point and that makes his article worth reading if you are a non-charitable planner.

Last thing I learned (or at least confirmed):  Harldly anyone does these things (but for some super wealthy who trust guys like Paul).  Why?  Other options can be done without losing, just try it, and failure only means you start again.  Failure with a lead trust means that the trust ran out of money, charity doesn’t get everything promised, family gets nothing, and donor may have used up some of his precious lifetime giving exemption on a technique that failed to pass anything to the kids.

This leads to the one point I would have raised with Paul had I not glazed over in the last part of his presentation about insurance schemes built into lead trusts and stuff about private equity (no clue where he was going on that):

Paul noted that lead trusts were considered a risky wealth transfer option since no one wanted to do it with a reportable gift against their lifetime exemptions (therefore the investment rates needed for success are very high to offset a “gift” – called the zero’ed out lead trusts).  I wanted to ask him about this year and next being great years for individuals to max out their lifetime giving of $5 million each spouse.

Why not create a lower payout lead trust? That would require the filing of a gift against your lifetime exemption but would be much easier to guarantee good results for both the charity and the family.  Instead of a 7% payout to charity, make it a 3% payout to charity and report a gift to children of up to $5 million.  Then pick a conservative enough investment so that everyone can sleep well at night.

One last word.  Based on this speech, I might say that an attorney or financial advisor that is already guiding clients towards lead trusts, better offer some sort of laddered payment option or he or she might be guilty of malpractice (or at least giving poor advice).


  1. my charity has received two of these types of lead trusts as campaign gifts, one with the 20% increasing payments during term and one shark fin (not quite as dramatic as the one you describe, but still a large final year payment after more modest pyaments in first 14 years). Both donors worked with the same law firm, so suspect their other clients may be doing these as well.

  2. it is a great innovation that lowers the market risks involved with lead trusts. Thanks for the comment!

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