One of the great pleasures of inheriting wealth or selling a business is being able to help the community, many of our clients say. Confronting the bewildering variety of philanthropic vehicles is less fun, though often critical to maximizing the impact of the gift and achieving other goals. This case study, drawn from our experiences with clients, highlights a few key issues in deciding on a long-term giving strategy.

Eric and Eleanor, a married pair of entrepreneurs, wanted to donate to charity $1 million from the $34 million in expected proceeds from selling their business. They preferred a long-term, irrevocable giving vehicle that would provide an up-front charitable deduction that they could use to offset the taxable gain from the business sale. Two potential vehicles seemed suitable: a donor-advised fund (DAF) and a grantor charitable lead annuity trust (CLAT). But which should they use?

With the DAF, the couple thought that they would distribute 5% of the fund’s value each year to various charities. With a growth-oriented investment allocation, we estimated that the fund could distribute $900,000 over 20 years and still have nearly $800,000 left in inflation-adjusted dollars, in the median case.

We call the combined amount “total philanthropic value,” or TPV. Over 20 years, we estimate, Eric and Eleanor’s $1 million gift would have a TPV of $1.7 million. Over 40 years, it would have a TPV of $2.5 million, as the Display below shows.

A CLAT, by contrast, would distribute the donation to charity over a set number of years; any remainder due to growth above the 7520 rate set by regulators would go free of transfer tax to non-charitable beneficiaries, as shown in the left side of the next Display). If Eric and Eleanor funded a 20-year grantor CLAT with $1 million and invested it in the same growth-oriented allocation, the CLAT would distribute nearly $60,000 a year, based on 7520 rate of 1.8%. It would distribute approximately $1.2 million to charity over 20 years.

We estimate that in typical markets, after 20 years the CLAT would still have a remainder value of $600,000 in inflation-adjusted assets, represented by the diamond in the bar on the right side of the Display. Eric and Eleanor could transfer the remainder to their children, free of transfer tax. If markets were very hostile, however, the CLAT would possibly pass only $20,000 to the kids. That rounds to the $0.0 million at the bottom of the same bar on the right side of the Display.

The DAF would give more to charity. Eric and Eleanor decided to go with the DAF, because they were committing $1 million to a separate trust for their children, and they might have more to give them later on.

© AllianceBernstein

© AllianceBernstein

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