Without a doubt, I plan to be the winner of the $1.5 Billion Powerball jackpot this Wednesday. I have $20 worth of tickets in hand and I just know the winner is there. I also now know that you can’t buy lottery tickets with a debit card, only cash. Sorry to the line of people behind me who had to wait while I ran to the ATM.
If I am not freakishly lucky enough to win, somewhere there will be a new billionaire in need of sound financial advice and a strategy to manage his or her newly won windfall income. Charitable giving would be a significant part of my financial conversation if I won. Are you prepared for a possible conversation with your clients or donors?
As of Tuesday afternoon, the jackpot stood at $1.5 Billion with a $930 Million cash value option. Even with Uncle Sam taking his first cut (and he will come back for more), the winner will have more than a cool $465 Million to manage.
So what charitable giving strategies are available and best-suited for windfall income?
Easy to understand, simple to set-up and tax-efficient, a donor-advised fund (DAF) is a great first charitable step. All assets donated to a DAF allow the donor to receive an immediate charitable deduction but since they are invested and managed by a financial advisor, the assets continue to grow. A DAF will allow the winner time to figure out exactly which charities he or she wants to support and in what manner. Better yet, a DAF allows for complete anonymity, a feature I’m sure most lottery winners crave.
Charitable Lead Trust
Depending on the format chosen, a charitable lead trust (CLT)can provide a current income tax deduction and reduce gift and estate taxes, all while providing transformative gifts to charities you love.
Non Grantor CLT
By transferring money to a term-of-years non-grantor CLT, a donor makes gifts to the charities of their choice for a predetermined term of years and once this term expires, any remaining assets are paid to heirs. This format allows for an estate or gift tax deduction, thereby reducing the tax on the money heirs will inherit.
The term-of-years grantor CLT format provides an upfront, one-time income tax deduction while payments are made to predetermined charities during the term of the trust. At the conclusion, the assets are returned to the donor.
Charitable Remainder Trust
By donating money to a charitable remainder trust (CRT), the winner will create a lifetime income stream, obtain an immediate income tax deduction and leave a significant gift to charity at the end of the term of the trust. The only hurdle with this gift type is age, as most individuals under 27 (couples under 40) won’t meet the age requirements for payouts.
Move over Bill Gates, there’s a new philanthropist in town. Private foundations have long been the preferred charitable giving vehicle of the wealthy, mostly because of the control the donors retain. From choosing a board of directors, to grant making and investment decisions, some donors want the final say on everything. Also, a private foundation allows for the founder and family members to be compensated for their services.
Lottery winner or not, any windfall income event presents the opportunity to discuss charitable giving with your clients. Don’t worry about becoming an expert on these giving vehicles, that’s why Renaissance is here. Call us anytime to discuss your client’s needs and charitable desires and we’ll come up with the best solution.
And to all those holding a Powerball Ticket, may the odds ever be in your favor!