charitable lead trusts

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!

Planned Giving Advisors Now Offering Webinars!

Click here to learn more about upcoming Webinars on various planned giving topics from Planned Giving Advisors!

Following-up to our highly successful Planned Giving Boot Camp program, we are now offering webinars on timely topics to help broaden your knowledge base in planned giving.  To kick off this program, we have two guest speakers on special topics and Jonathan Gudema discussing Lead Trusts in late October and early November.

As always, we aim to offer the most convenient and cost effective programs.  For these special webinars, one registration can be used for as many people as you wish at one location and a link to the recording will be provided for all registrants, in case you or anyone on your team are unable to join the live session.

Thank you for reading the Planned Giving Blog!

Best regards,

Jonathan Gudema, Esq., Managing Editor of the Planned Giving Blog and Founder of Planned Giving Advisors


Why Lead Trusts are so rare

As I follow-up to my previous post, which proved from IRS statistics that very few charitable lead trusts are established annually, I want to briefly address the likely reasons for the small number of this wonderful giving option (thank you to those who commented for your input!).  If you aren’t sure what Lead Trusts are, search this blog for various posts on them – this post is directed at those who already understand them fairly well.

Here are my top ten reasons why we see very very few lead trusts:

  1. The required payout rates to avoid all or most gift/estate tax are too high!  Even under today’s mega-low AFR environment, your lead trust still needs to pay the charity at least 6% annually for a 20 year trust, 8% for a 15 year trust.  Think about it – if your investment plan for the trust assets can’t guarantee well more than those rates, forget about a lead trust.
  2. The required terms to avoid all or most gift/estate tax are too long!  Really the same  point as the first point.  Most people considering lead trust don’t want to use any of their lifetime gift/estate tax exemption.  That being the case, your lead trusts need to be 15-20 years or more!  Someone in the Hess family did a 35-year lead trust!  Click here for article on that one.
  3. The investment returns to make lead trusts work are not realistic in most cases!  This is also connected to the first two points.  If you are ok with a 20-year term paying the charity a 6% annuity, you better feel confident that your trust can earn 8% or 9% or better.  If not, this may not be worth doing – it could actually reduce the heirs’ inheritance!
  4. Finding the right funding asset/investment is close to impossible!  Building on the previous point, you need to find an asset that will produce the cash flow to cover the 6%+ payout rate as well as grow.  To me, commercial real estate sounds like a great option.  Problem with commercial real estate is that most properties/interests in properties are leveraged in ways that prevent donors from using them for lead trusts (I had that happen to one of my perfect lead trust donors).
  5. Professional advisors are not knowledgeable about them.  I am not talking about one’s ability to talk like you know what you are doing – I am talking about really knowing them!  If you are an advisor, did you know that Lead Trusts are NOT done to avoid capital gains?  Did you know they are NOT done for income tax deductions?  If those two questions have you wondering, you DON”T understand lead trusts very well.
  6. Charity advisors aren’t knowledgeable about them.  This doesn’t bother me that much because charities should NEVER act as trustee for a lead trust.  In fact, while advice from a charity can help, a lead trust is a key piece of one’s estate plan which requires full participation of the estate attorney and very little practical help from the charity.  Still, charity advisors could teach the estate planning and professional advisor worlds about lead trusts and maybe encourage more to happen.
  7. It may not even be the best planning option for ultra-wealthy philanthropists with heirs.  I have one estate planning client who fits the bill for a lead trust – very charitable, concerned about estate tax, looking to pass assets to his heirs with a decent time delay and has assets that may soar in value.  But, at the end of the day, GRATs worked better for him because he needed more flexibility to swap assets in and out of the GRATs and worst case for him, the assets all passed back to him and he starts new GRATs.  He is setting aside assets for big giving and not bothering with lead trusts.
  8. Complex, complex, complex!  Did you know that a charitable lead trust is not a “tax-exempt” trust?  It is actually considered a complex trust for accounting purposes.  And complex it is.  And, the less people understand these things, the less likely they will happen.  Just my theory but it seems to work that way.
  9. Did I mention finding the right donors is also like finding a needle in a haystack?  Yes, you need to find a donor where all of the bells and whistles hit on target.  Facing significant estate taxes (with an estate well in excess of the federal $5.23 million per person exemption)? Otherwise, there is no reason to even consider them.  They need to be seriously charitable.  Like I said above, there are other similar, non-charitable options that work.  And, then you need the right asset/investment and a payout/term that makes sense to your donor. Would be nice, too, if your donor understood what a lead trust really is.
  10. Too many easier giving/planning options that make more sense to your donors.  When a donor or client gives me that blank stare (as lead trust discussions often cause), I know I’m not in good territory.  How about a CRAT?  How about a GRAT? Yea, that sounds good.  I get the message and quietly slink my lead trust pages away.  Donors and clients tend to stick with what they know and have done before.

Trust me, I would love to be working on lead trusts.  I’m not a naysayer by nature. All I am saying is learn what they are really about and see if you can ever sell one.  I wish you luck and offer to discuss any real lead trust scenario with you for free!  Send me an email if you think you have a live one ( and I’ll give my advice, for whatever it’s worth.


Perfect Storm for Lead Trusts – IRS rate drops again, Estate Taxes about to soar

The IRS discount rate for August for valuing charitable gifts (referred to as the AFR or midterm rate) was just announced at 1%.  (This very low rate is actually negative for life income gifts like gift annuities or charitable remainder trusts because it reduces the income tax deduction but for lead trusts, it increases the amount of gift tax deduction – see for an in-depth look at lead trusts)

The estate tax, as mentioned often on this blog, is scheduled to jump to the 2001 rates of 55% top bracket and only a $1 million lifetime exemption on 1/1/13.

If there was ever a time to think about a lead trust – for the charitably inclined who are also concerned about estate taxes – it is now!

Ok, let’s be real, how many of these trusts are really going to happen?  And, if not many, why should we (the fundraisers and other nonprofit leaders) care about them?

In 2001, there were 4,571 lead trust tax returns filed. In 2010, there were 6,609 such returns.  Not that many considering that these trusts last often for 15 to 20 years.  Looking at charitable remainder trusts, we see over 100,000 of them in existence as of 2010.  Probably in the millions for gift annuities.

There have been plenty of favorable times for lead trusts yet they haven’t “taken off” in the planning world.

Well, I actually don’t believe we will see very many lead trusts created now, regardless of the “perfect storm” environment.  Lot’s of reasons. Primarily, they are still too complex not only for donors but also for their advisors.  And, in any case, if you understand them well, you will understand why they don’t work that often.

Here is an example that I just ran today, under the new all time low 1% AFR:  a 15-year $1 million funded lead annuity trust with a maxed-out gift tax deduction (i.e. give me an illustration that shows a $0 gift to the kids).  The payout rate: approx. 7.3%.  That means for this trust to really work well for everyone involved (charity and kids), it better earn at least 8% a year, with no risk of big investment losses (especially in the early years) for 15 years.  In other words, unless someone has an asset that is going to produce that 8% or better return in a guaranteed way for 15 years, your donor might be better offer making annual gifts than to use a lead trust.

That actually takes us to why lead trusts are important for fundraisers.  You see, if you enter into lead trust discussions with a donor, you know a few things about the donor’s situation:

  1. They are wealthy enough to be concerned about estate taxes.
  2. They are charitable enough to be looking for a way to benefit your organization through their estate plans.
  3. They are willing to entertain the best possible tax ways to help your organization, as long as they meet some other planning goals.
  4. Actually, to me, it shows that they really like the idea of helping your organization in a big way.

Think about it.  If you are knowledgeable enough on this topic to spot a potential lead trust donor and feel comfortable enough starting the conversation (with at least an attorney or consultant to help out when it gets beyond your knowledge), the end result may be a wonderful gift.

It just might not be a lead trust – it may end up being a straight multi-year pledge! You may also end up with a bequest commitment. Could be a very one, considering the donor attributes mentioned above.

So, it is worth it for fundraisers to get up to speed on this option. You never know!