The Rarely-Used Charitable Strategy That Can Save Taxes Big-Time
A new client of ours - let's call her Jane (not her real name) - came to see us recently. As a result of a settlement, she is facing a very large tax bill this year, a situation that will not repeat next year. She is also at least 15-20 years from retirement. What can Jane do to generate a significant tax deduction this year, when she needs it most, without risking her eventual retirement?
The answer: a grantor charitable lead trust (CLT). Under the grantor CLT, Jane will "park" a certain amount of money into the trust. The trust will make charitable contributions annually for a pre-determined number of years. At the end of that term of years, what remains in the trust reverts back to Jane.
In Jane's case, setting aside $400,000 into the CLT for a period of 15 years, with the CLT paying $20,000 per year to charity, results in a tax deduction this year of $256,986! [Assumes 2.0% Applicable Federal Rate.]
In essence, using the grantor CLT allows you to front-load multiple years' worth of charitable deductions into a single year.
It's a mystery to me why grantor CLTs are not used more often. They are simple for clients/donors to understand, and today's low interest rate environment means larger charitable deductions, thanks to the formula used to calculate the deduction.
As in Jane's example above, the grantor CLT is most beneficial when someone has the following fact pattern:
- A one-time windfall that results in a single-year spike in taxable income
- The ability and willingness to temporarily set aside some or all of the windfall for a period of years, where the money cannot be accessed for personal use
- Charitable intent generally
I've written about the grantor CLT before on my blog - and I continue to believe it is one of the most under-utilized yet powerful tax-saving strategies available today.
Building relationships with others so that they are empowered to improve our world ?? | Values-based financial planning for individuals and businesses | Charitable Giving Strategies | Exit Planning | AZ, CA, Nationwide
9 年Thanks for the kind words, Mick Koster and Joe Komsky, CFRE. With the AFR at record-low levels still, the leverage on the charitable deduction is excellent. Won't be so once interest rates start moving back up.
Assistant Vice President of Development at Carnegie Mellon University
9 年Well done, Juan. This is a favorite strategy of mine, too, topped only by the testamentary lead trust.
Regional Advancement Director, Leukemia & Lymphoma Society
9 年This is good stuff. Thanks for explaining it in a simple to understand way. I can think of a couple of donors who fit or will fit this profile in a couple of years.