Legacy Planning: $5M Charitable Trust Creation

Legacy Planning: $5M Charitable Trust Creation

Executive Summary

A family with substantial assets sought to establish a lasting charitable legacy that would benefit specific causes for generations. Harrington Legacy Advisors partnered with Golden Door Asset to create a $5 million charitable trust, strategically designed to provide ongoing funding for their chosen charities while minimizing tax implications and ensuring the family's philanthropic vision is preserved over time. This initiative ensures a perpetual stream of support for the family's passions, creating a significant and enduring positive impact on the community.

The Challenge

The Harrison family, successful entrepreneurs with a net worth exceeding $25 million, were deeply committed to supporting youth education and environmental conservation. They regularly donated approximately $100,000 annually to various charities through ad-hoc donations. However, they recognized the limitations of this approach: their giving was reactive, lacked a long-term strategy, and was entirely dependent on their continued personal involvement. They wanted to create a more structured and sustainable way to support these causes, even after they were no longer actively managing their finances.

Specifically, the Harrisons were concerned about several key challenges:

• Lack of Longevity: Their current giving relied solely on their personal income and discretionary spending. They worried about future economic downturns impacting their ability to donate consistently and the impact on their charities of choice.
• Tax Inefficiency: Their ad-hoc donations, while generous, were not optimized for tax benefits. They were leaving potential deductions on the table that could have amplified their giving power.
• Succession Planning: They wanted to involve their children in the charitable giving process but lacked a formal structure to guide their involvement and ensure the continuation of their philanthropic values across generations. They feared that their children might not share their same passions or have the expertise to effectively manage charitable donations.
• Administrative Burden: Managing numerous donation requests and tracking their charitable contributions was becoming increasingly time-consuming and complex. They desired a streamlined and automated system to simplify their charitable giving.
• Impact Measurement: They struggled to effectively measure the impact of their donations. They wanted a way to track the progress of the charities they supported and ensure their funds were being used efficiently and effectively. Without clear metrics, they feared their contributions might not be making the desired difference.

They projected that without a structured plan, their charitable giving could dwindle to near zero within 20 years if their business experienced a downturn or their children pursued different philanthropic priorities. This potential loss of impact was a major concern.

The Approach

Harrington Legacy Advisors, leveraging insights and analysis from Golden Door Asset's AI-powered tools, developed a multi-faceted approach centered around the creation of a charitable trust:

1. Philanthropic Visioning: We began by conducting in-depth interviews with the Harrisons to clarify their philanthropic goals, identify their core values, and define the specific areas of impact they wished to support. This involved using Golden Door Asset's sentiment analysis tools to identify the underlying emotional drivers behind their charitable giving preferences, ensuring the trust aligned with their deepest values.

2. Charitable Trust Structure: We recommended establishing a Charitable Remainder Unitrust (CRUT) due to its flexibility and tax benefits. The Harrisons would contribute $5 million in appreciated stock to the trust. The CRUT would then pay out a fixed percentage (5%) of its assets annually to the Harrisons for a term of 20 years, providing them with an income stream while simultaneously benefiting their chosen charities.

3. Grantmaking Guidelines: We worked with the Harrisons to develop specific grantmaking guidelines for the trust, outlining the types of organizations to support, the criteria for evaluating grant applications, and the reporting requirements for grantees. This ensured that the trust's funds would be used in a way that aligned with their philanthropic vision. We created a tiered system, prioritizing organizations focused on youth education (60%) and environmental conservation (40%).

4. Tax Optimization: The contribution of appreciated stock to the CRUT allowed the Harrisons to avoid capital gains taxes on the sale of the stock, resulting in significant tax savings. The charitable deduction generated from the contribution further reduced their current income tax liability. We estimated the immediate tax benefit to be approximately $1.25 million (considering both capital gains avoidance and the income tax deduction).

5. Succession Planning: We established a family foundation within the trust structure, allowing the Harrisons to involve their children in the grantmaking process. We created a framework for rotating board membership and providing educational opportunities for the children to learn about philanthropy and responsible grant management. This ensured the long-term sustainability of their charitable legacy.

6. Investment Strategy: We developed a diversified investment strategy for the CRUT, focusing on long-term growth and income generation. The strategy included a mix of stocks (60%), bonds (30%), and alternative investments (10%), designed to provide a consistent stream of income to the Harrisons while preserving the trust's principal.

7. Legal and Compliance: We collaborated with estate planning attorneys to draft the trust documents, ensuring compliance with all relevant regulations and tax laws. This included obtaining IRS approval for the trust's tax-exempt status.

Technical Implementation

The implementation involved several key technical and financial calculations and processes:

• CRUT Calculation: We projected the annual income stream the Harrisons would receive from the CRUT based on the initial contribution of $5 million and the 5% payout rate. This resulted in an estimated annual income of $250,000.
• Tax Deduction Calculation: We calculated the charitable income tax deduction based on IRS guidelines, considering the present value of the remainder interest passing to the charities. This required using actuarial tables and discount rates to determine the present value of the future charitable benefit. The immediate income tax deduction was estimated to be $800,000.
• Capital Gains Tax Savings: By donating appreciated stock, the Harrisons avoided capital gains taxes on the $2 million of appreciation. Assuming a capital gains tax rate of 20% plus a 3.8% net investment income tax, this resulted in tax savings of $476,000.
• Investment Portfolio Construction: We used Golden Door Asset's portfolio optimization tools to construct a diversified investment portfolio that met the CRUT's income needs and risk tolerance. This involved analyzing historical performance data, correlation matrices, and risk-adjusted return metrics for various asset classes.
• Grant Management System: We implemented a cloud-based grant management system to streamline the grant application process, track grant progress, and generate reports on the impact of the trust's donations. This system integrated with the trust's accounting software to provide a comprehensive view of the trust's finances and charitable activities.
• IRS Compliance: We worked with the estate planning attorneys to prepare and file all necessary IRS forms, including Form 5227 (Split-Interest Trust Information Return) and Form 990-PF (Return of Private Foundation).

Results & ROI

The establishment of the $5 million charitable trust yielded significant results and a substantial return on investment for the Harrisons:

• Guaranteed Charitable Giving: The trust ensures that their chosen charities will receive ongoing funding for at least 20 years, with the potential for perpetual support depending on the trust's investment performance.
• Tax Savings: The Harrisons realized immediate tax savings of $1.276 million ($800,000 income tax deduction + $476,000 capital gains tax avoidance). Over the 20-year term, these savings are projected to grow substantially.
• Income Stream: The 5% payout rate provides the Harrisons with an annual income stream of $250,000, supplementing their existing income and providing financial security.
• Family Involvement: The establishment of the family foundation within the trust structure has fostered greater family engagement in charitable giving, ensuring the continuation of their philanthropic values across generations. Their children are now actively involved in reviewing grant applications and recommending grant recipients.
• Simplified Administration: The cloud-based grant management system has streamlined the administrative burden of charitable giving, freeing up the Harrisons' time to focus on other priorities. They now spend significantly less time managing donation requests and tracking charitable contributions. Before the trust, they spent roughly 15 hours/month on these tasks. Post-trust, it's down to 2 hours/month.
• Measurable Impact: The grant management system allows the Harrisons to track the progress of the charities they support and measure the impact of their donations. This provides them with a greater sense of satisfaction and ensures their funds are being used effectively.
• Long-Term Legacy: The charitable trust has created a lasting legacy for the Harrisons, ensuring that their philanthropic vision will be preserved for generations to come. They are now confident that their values will continue to be reflected in the trust's grantmaking activities long after they are gone.

Key Takeaways

Here are some key takeaways for other advisors considering similar strategies:

1. Start with a Clear Philanthropic Vision: Before implementing any charitable giving strategy, take the time to understand your clients' values, goals, and priorities. This will ensure that the strategy aligns with their philanthropic vision and maximizes their impact. Utilize tools like Golden Door Asset's sentiment analysis to uncover underlying motivations.
2. Explore the Benefits of Charitable Trusts: Charitable trusts can provide significant tax benefits, income streams, and long-term planning opportunities for clients. Consider the different types of charitable trusts and determine which one best fits your clients' needs.
3. Involve the Family: Incorporate succession planning into the charitable giving strategy to ensure the continuation of philanthropic values across generations. Create opportunities for family members to become involved in the grantmaking process.
4. Leverage Technology: Utilize technology to streamline the administrative burden of charitable giving and track the impact of donations. Implement a grant management system to simplify the grant application process and generate reports on the trust's activities.
5. Seek Expert Advice: Collaborate with estate planning attorneys, tax advisors, and investment professionals to ensure that the charitable giving strategy is properly structured and implemented. Compliance and legal considerations are paramount.

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