Ahhhh…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!).