The current historically low interest-rate environment creates a unique opportunity to maximize your income-tax benefits from a not-often-used split-interest planned-gift arrangement called the grantor lead annuity trust, or GLAT.
How it Works
A donor (the grantor) creates and funds a GLAT and directs the trustee to pay a charity a fixed percentage of the trust’s initial value for a specific number of years—usually but not limited to 10 to 20. Unlike a charitable remainder trust, the GLAT has no requirement to peg the percentage payout rate to be at least 5%—it can be more or less. The choice is the grantor’s.
At the end of the trust’s term, its assets are returned to the grantor.
Your charitable deduction may vary
The grantor is allowed a charitable income-tax deduction for the present value of the income stream the charity will receive from the trust over its duration. Note: The longer the trust’s term and/or the larger the payout rate to the charity, the larger the charitable deduction.
What if the discount rate had been higher?
Had the discount rate been 6% as it was a few years ago, Peter’s deduction for the same gift would have been $44,161—nearly $10,000 less! For income-tax purposes Peter remains taxable on all the GLAT’s earnings—including amounts distributed to charity. However, the tax paid on the amount distributed to the charity depends on the character of the GLAT’s earnings (e.g., income, capital gain, tax-free, principal).
Ideally, a GLAT would be funded with tax-free, municipal bonds whose yield equals the amount distributed to charity. Then there would be no taxable income attributable to the grantor. These days 6% is a rather high yield; but if the grantor had purchased municipals long ago when higher yields were available, then these could be used.
The next best asset to fund a GLAT is appreciated stock. In this case, the portion of the proceeds of any stock sold that represents the appreciation would be taxable to the grantor. But currently this would be taxed at only 15%—not too bad. So if in our example above the $100,000 had a cost basis of $70,000 and $6,000 worth was liquidated to pay the distribution to charity, then 30% of that amount ($1,800) would be capital gain to the grantor with a tax of $270 (15% of $1,800). Over the 10-year term of the trust, assuming for simplicity that there is no change in the value of the trust, the total tax would be $2,700 at 15% or $3,600 if the capital-gain tax rate goes up to 20% as anticipated.
How a GLAT can be an effective way to discharge a multi-year pledge
If you plan to make a multi-year charitable pledge to support our work, the GLAT could be an effective way to discharge your commitment. The GLAT has to be established prior to making the pledge.
How a GLAT can reduce or eliminate your Roth IRA conversion tax
If you plan to take advantage of the new opportunity to convert a traditional IRA to a Roth IRA this year, a GLAT could be an effective way to offset your tax liability.
The current low IRS discount rate of 2% makes planning with a GLAT very attractive in the right situation. Please let us know if we can assist you and your advisor in your planning.