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SPTC case study Charitable lead trust (CLT) The Smiths are in their 60s and have sold a piece of commercial real estate to support their retirement years. The tax gain was substantial, and the Smiths are looking for a way to save on taxes. The advisor learned at a meeting with the Smiths that they also have charitable wishes. The advisor discussed a few planning options, such as direct gifts to charitable organizations, a donor- advised fund, and a charitable lead trust that could help with both tax and charitable matters. Together, the advisor and the Smiths developed a charitable lead trust strategy, and the advisor provided the following: A 5% grantor charitable annuity trust of $1 million with a 15-year term. This means that the trust would make charitable contributions of $50,000 each year for 15 years. After the term expires, the remaining amount in the trust would be transferred back to the Smiths. The grantor CLT generates a charitable tax deduction, which can help the Smiths save on taxes. The Smiths chose an annual $50,000 distribution from the CLT to their favorite charity for two reasons. First, they plan to invest in an equity-focused strategy in an effort to generate the returns to cover the annual payout. Second, the higher the payout, the larger the charitable deduction is in the year the trust is funded. The Smiths wanted the trust to terminate before they turned 80 years old. They can use the trust proceeds at its termination to supplement their lifestyle. The charitable deduction generated is $662,115.2 Essentially, the Smiths are getting the present value of the future charitable contributions in the year they need the tax deduction most. Because the Smiths are in the highest federal tax bracket, the tax savings is $244,983 ($662,115 x 37%). Each year, the trust will issue a Form K-1 to the Smiths. They should consider tax management for the trust assets since they will need to pick up trust income on their personal return after investment and administration costs. The Smiths will work with their estate attorney to draft a trust document (for a separate fee). SPTC does not draft documents as part of their administrative duties. The Smiths liked the CLT idea because it: 1. Created a much-needed tax deduction 2. Satisfied some of their charitable planning 3. Gave comfort that the remaining trust assets, if any, will be returned to them or their estate at a future date 4. Was designed and executed in a relatively straightforward way 5. Kept things simple; they decided to have the trust administered by a corporate trustee, which includes tax return preparation The Smiths should be able to meet their goals and objectives using a charitable lead trust. The CLT can solve their financial needs, and the charitable contributions mean something important to them. Consider the disadvantages of a CLT too: • Does not qualify for income tax deduction unless you are also the owner of the charitable lead trust • Requires an irrevocable commitment • Requires the charitable payment to be made each year, regardless of whether there is sufficient trust income available • Charitable trusts are subject to specific IRS rules 2 The charitable income deduction was calculated using Crescendo Planning Software Version 2022.1. The planning software does not consider state or local taxes.

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