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:
- 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.
- 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.
- 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!
- 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 (firstname.lastname@example.org) and I’ll give my advice, for whatever it’s worth.