Acting as the Trustee of a Charitable Lead Trust
(Added 8/11/2014)
Because interest rates have been fairly low these past few years, we've been advertising the advantages of charitable lead trusts. An attorney called the other day – our first bite! – and said one of her clients (I presume one of our prospects, but I don't know who) would be interested in exploring the idea further. Her big question had to do with trusteeship. Some years ago, our board authorized our organization to act as trustee of remainder trusts, and we went through a lot of ethical questions to make that decision. So now I wonder if there's anything I should be aware of when speaking to the attorney on this topic. Specifically, even if we feel we can handle the investment and administration aspects, should we offer to act as trustee?
Managing a lead trust is very different from managing a remainder trust. Because lead trusts are not tax-exempt, managers must buy and sell assets with taxation in mind. Therefore, a more complex calculation must take place to make sure, as much as possible, that the gains that are realized in any one year can be offset by the deduction allowed for the payment to the charitable beneficiary; otherwise taxes will eat some of the gains. Some loss to taxes might be unavoidable as investing is hardly an exact science, but those who manage lead trusts must be thoroughly familiar with how a lead trust operates.
By the way, many lead trusts are funded with assets that might throw off a dividend to pay the beneficiary but which themselves are not really managed – closely held stock, for example. In that situation, the investment questions might not be so complex.
But that's not really the big issue. The big issue is one of psychology. Many lead trust remaindermen are the children or grandchildren of the grantor. In this sense, the trustee is investing as much for their future as to secure the charity's income. That is, the question becomes one of expectations relating to the amount of the remainder at the end of the trust's term. It is not unusual for the children to think this is their money, that the charity may be borrowing it for a while to generate income but that the trust's corpus is really their inheritance. Even though your investment people might say they are comfortable with the intricacies of lead trust management, I would want to think long and hard about this. Any perceived misstep, even though it might be wholly unrelated to the money manager's competence – even though it might not even be a misstep at all – could be turned into a legal or public relations problem. Keep in mind that lead trust marketing materials – and here I'd ask you to review your own, as you say you've "been advertising the advantages of lead trusts" – tout that this vehicle can generate a lot of money that can be transferred tax-free, or at severely reduced tax, to the next generations. If what's left isn't at or above the levels advertised, you could receive complaints, possibly publicly voiced, from the remaindermen. This is a consideration even though the trustee – of remainder and lead trusts – almost always outsources the actual work. Still, as the fiduciary caretaker of the assets, the trustee is in the hot seat.
The easiest way to deal with this issue is for someone else, a family advisor or a bank, for example, to act as trustee. But you don't want to just pass the buck. If, in this partnership, you want to play a role in protecting not only your income but in accomplishing the goal of a satisfactory transfer of assets in the future, you want to do whatever possible, if you have any say in the matter, to ensure that the trustee is competent. If your organization does agree to act as trustee, I would recommend that you are represented by your own counsel and that all parties to the trust – the grantor, the spouse, the children and other remaindermen if there are any, and you – review all aspects of the trust's operation and agree in writing what the expectations are and how potential issues will be resolved.