A Perfect Marriage -- Charitable Lead Trust and a Donor Advised Fund

Many legal and financial advisors are suggesting that their philanthropically inclined clients consider a charitable lead trust (CLT) to accomplish charitable objectives and to maximize the effectiveness of their $1 million per person lifetime gift exemption (and their $2 million generation skipping exemption per person, paying a transfer tax of 45%). A CLT pays out a fixed percentage of its assets (often 5%) annually to a charity for a period of years (often 20 years), after which the assets may pass on to children or grandchildren. The payout to charities may be fixed at the time of the CLT's creation (an annuity trust), or the payout may be adjusted annually based on the value of the CLT (a unitrust).

While the charitable payout can be made to any nonprofit or combination of nonprofits, the use of a donor advised fund at a community foundation (DAF) to receive the distributions makes great sense. With only one charitable recipient and only one transaction per year, the trust administration is greatly simplified. Furthermore, community foundations usually have experience with this kind of distribution and know how to receipt it properly for the trustee's purposes. Some community foundations will serve as trustee, which further simplifies the process.

The DAF typically is advised by the grantor's family. Since a DAF is not required to distribute all the contributions coming in from the CLT, you can build a substantial charitable endowment over a 20-year period of time. Using conservative investment return assumptions (2% above the payout rate plus expenses for the CLT, and 8% for the donor advised fund), a $1 million CLT paying out 5% annually will appreciate to $1,486,000 in 20 years, and the donor advised fund will grow to $1,601,000. Annual grantmaking from the donor advised fund will grow to $74,000 by the 20th year.

The grantor's children and/or grandchildren thus will receive two benefits. They will receive the assets of the CLT when it matures. They will also have the ability to recommend grants from a charitable endowment on an ongoing basis. Beyond the grandchildren's lifetime the charitable endowment will remain as the family's permanent philanthropic legacy, continuing in perpetuity to meet community needs. Hence, the value of a community foundation donor advised fund - local knowledge to assist the family during their lifetimes and to implement effectively their vision in the ensuing years.

You should contact your legal or financial advisor to explore the creation of a CLT before the end of July, when the rates used to determine their tax effectiveness will rise. If you email me at rthalhimer@tcfrichmond.org, I will be glad to send you the complete spreadsheet showing how the CLT works together with a donor advised fund.

Robert Thalhimer