Through an office contact, I was introduced to a “perfect” lead trust donor – a guy looking to get it done quickly, already vetted for this particular vehicle (or so he thought), all of the right factors. As usual with “perfect” lead trust donors, I start with the basics to just see if this is really a candidate and check off the boxes to see if this is even an appropriate discussion topic for this donor:
Do you and your wife have over $20 million in assets to even be concerned with estate taxes? Check.
Are you looking to pass assets in the future to your children? Check.
Do you have an immediate income tax need? Check, he’s selling a business (cash sale) and getting hit with huge income taxes this year.
Charitable? Check, has long-term ideas for giving.
So, we are talking about a Defective Grantor Lead Trust that will get both an upfront income tax deduction as well as future growth potential, and lots going to charity.
More questions:
What kind of investment for the Lead Trust itself do you have in mind? Real estate type – LLC or LLP or REITs – good choices. Check.
What kind of payout to charity? 6% annuity over 20 years sounds good to him. Great. Check.
Last round of questions:
What charity do you have in mind? Uh oh. Wants charitable annuity to flow to his private foundation. It’s doable but there are some caveats. 1. IRS only allows if the grantor recuses himself from final decisions on grants of these particular funds – doable. 2. The tax deduction ceiling for any lead trust that allows any payments to any private foundation is limited to the 20% of AGI (read this point again if it is new to you as it was to me!).
Yes, this donor would be limited to 20% of his AGI in charitable income tax deductions per year for this gift. Yikes. He was hoping to put $6 million in with a $5 million or so charitable deduction. But, he would only get to deduct $ 1 million of that deduction this year! He is facing over $10 million in ordinary income this year and was hoping to save much more on that end. In any case, he suspects that he won’t have enough future income to use up all of those carryover deductions!
What if he directs all of the annuity payments to a public charity? Does he get the 60% ceiling, which was hoping for? Nope! At best, he gets the 30% ceiling against his AGI! (Did you know that the income tax deduction for lead trusts is always treated as a “stock gift” for AGI ceiling purposes? I didn’t and I teach courses on lead trusts!!!)
My last suggestion? Look into an immediate gift to a donor advised fund for future giving and possibly half of his original intent into a lead trust.
Haven’t heard back from him. Oh well. This guy was as close to being a perfect defective grantor lead trust donor as you could find but the devil is in the details, as usual.