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Wednesday, May 1, 2024
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Case Studies |
Giving (and Receiving) Through a Grantor Lead Trust
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Case:
Barbara Johnson, age 45, is a prominent personal injury attorney. She recently settled a case for her client, who was severely injured in an auto accident. The case was highly publicized since the driver, who was judged negligent, was a celebrity and was driving under the influence when the accident occurred. Barbara received a fee of $1 million for the case as her share of the judgment in excess of $3 million. Since the fee is taxable this year, she would like to generate a tax deduction to help offset the income. She is very involved with her church, which is currently in a campaign to build a new auditorium. She has considered making a five-year pledge to the church of $50,000 per year. However, she would like to have access to this money sometime in the future for various family needs.
Question:
Is there a charitable vehicle that would allow Barbara to fulfill her pledge, receive an income tax deduction and still have access to the full $1 million in the future?
Solution:
In consultation with one of the estate planning partners in her law firm, the suggestion was made that she fund a grantor lead annuity trust (CLAT) for a period of five years with the million dollars. The payout rate on the trust would be 5%, or $50,000 per year, which would be payable to her church. Since this is a grantor trust, the partner explained that she would be taxed on all the trust income. However, he stated that the trust could purchase municipal bonds exempt from both federal and state taxes, and therefore all the income from the trust would be tax exempt. The primary benefit of this arrangement is that Barbara would receive a charitable income tax deduction this year based upon the present value of the income stream to her church over the five-year period. This deduction is over $205,000. The other benefit is that the trust assets would be returned to Barbara at the end of the five-year trust term.
The result is that giving and receiving is multiplied by the use of this arrangement. Barbara gives to the trust and receives a tax deduction. The trust gives to her church and Barbara receives the assets back upon termination of the trust to use for her family's future needs.
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