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.


Lead Trusts – The Final Frontier?!

I can’t tell you how many times I hear consultants or financial planners talk boldly about charitable lead trusts (“lead trusts” or “CLTs”). In fact, I have heard of consultants telling starry eyed clients how lead trusts are going to play a “big role” in their upcoming campaign.  Even going so far as to suggest that you can count on a certain percentage of dollars coming via lead trusts.
Wow – there must have been an explosion of lead trusts on the scene in the last 10 to 15 years – or at least that is what people seem to indicate.
If you ever hear a consultant or financial advisor talk big like this about lead trusts, put them on the spot and ask:  How many lead trusts have you been directly involved with? Ask for a specific number!  Don’t be surprised if they admit to never having had any direct role with one in their entire careers.  (I had direct roles in 3 CLTs that actually came to fruition over close to 20 years and that is more than most).
Look at this slide!  The numbers are right from IRS statistics on split interest trusts.  It is a chart showing the number of lead trusts in existence per year between 2001 and 2012.  This was based on the number of tax returns filed (all lead trusts must file annual tax returns).Lead Trusts slideThese numbers are NOT new CLTs a year – they are the number of such trusts in existence each tax year.  This means the annual number includes existing CLTs from previous years plus new CLTs minus ended CLTs.  The biggest jump on this chart was between 2001 and 2002 of around 700 more.  2012 and 2010 saw drops in the actual numbers of CLTs.

Just as a frame of reference, there were over 100,000 CRTs in existence in 2012.  My guess is that CGAs might be in the millions.  

In other words, CLTs are rarely done.  Most fundraisers, consultants and even professional advisors have never been directly involved with them.   

The bottom line with CLTs – they are not easy to make happen.  Charities can not do them for their donors. Advisors are generally clueless with the actual details.  And, it is basically looking for a needle in a haystack to see one of these happen.  You need the right donors, the right funding assets, the right advisors, etc… (look at previous posts on lead trusts for more on why they are so difficult).  

Ok, there you have it.  CLTs are a rarity.  

Of course, you want to know about them and that’s why CLT topics on this blog get more hits than most other topics

So, if you have made it this far, stay tuned for an upcoming webinar training opportunity we will be offering readers on lead trusts. 

And, if your high paid consultant starts counting your future CLT revenue, take him or her to task.  Maybe he or she is willing to make their fees be contingent on that CLT revenue they are going to find for you?

New Lead Trust Opportunities Created by Tax Relief Act?

Among all of the variables created by the Tax Relief Act of 2010, one yet to be addressed in this blog is a much improved environment for Charitable Lead Trusts.

Normally, I cringe at hearing anyone tout Lead Trusts.  Not that I don’t love them – who wouldn’t in the nonprofit world since they are the planned gift that pays the charity now and has the family wait for their share after the term of the trust.

My problem with Lead Trusts has been their promotion by people completely ignorant of how they work.  Also, they are rare.  The IRS reports only around 6,000 of them currently in operation – most of which have been around for a while.  A few hundred new ones a year, maybe, across the country?  Low discount rates or not, they just don’t happen very often.

Rather than go into a full discussion of how they work, I will link here an article written two years  ago (a little dated but still applicable concept-wise) that gives you all of the details and why they are so challenging: Understanding Charitable Lead Trusts (click on it to download!).

The point of raising this issue again came from Robert Sharpe. He mentioned the use of lower rate Lead Trusts.  This is brilliant and I will explain why.

In the past, wealthy individuals were leery of using any of their Federal lifetime gifting exemption on Lead Trusts because the exemption wasn’t so high and if the Lead Trust failed to produce a gift to the family, you would have used the exemption for naught.

So, planners were forced to create what we call “zero’ed out” Lead Trust illustrations for Lead Trusts that would produce little or no gift tax reporting.  In other words, the trust has to pay higher and/or over a long period so that the value of the “gift to family” is essentially zero.  Problem with this is that it required Lead Trust payments of 10% or higher and/or 20 year or longer terms, or a combo of high payout and long term trusts.

When it came down to making a decision, there just seemed to be too much risk that the trusts could not produce enough guaranteed returns to guarantee the family any benefit.  In many cases, the family was bettor off making a multi-year pledge, taking the income tax deductions (which, by the way were lost if they did a Lead Trust), and passing assets to heir with other means.

What changed?  With a $5 million gifting window (to children and even grandchildren), and a chance that it will go down in two years (to as low as $1 million if there is gridlock in Congress – not so far fetched), now might be a time to structure a Lead Trust using some or all of the lifetime exemption amounts.

In other words, it is suddenly good advice to use that $5 million gifting opportunity NOW, instead of waiting for the ShangriLa of permanent estate tax repeal (i.e. not happening in our lifetime).  Financial advisers should be counseling their clients on methods to use the exemption while it is high and Lead Trusts are a prime method (because they combine discounting of the gifts, time delay, and philanthropic goals).

Here is an example that should drive this point home.  I just ran numbers this week on a $5 million Lead Trust, paying 3% ($150,000 a year) for 20 years.  The reportable gift is around $2.8 million.  Not a bad use of one’s lifetime exemption since with 3% payouts, there is a much greater likelihood of success for the family.  You could even invest in conservative,  long-term fixed income investments and see a nice remainder for the family.  And, the donor gets credit for a $3 million gift.

The point is that this type of planning (more conservatively structured Lead Trusts) is new with the Tax Relief Act and something nonprofits need to understand and introduce to their top prospects.