Charitable Lead Trusts

Description

A charitable lead trust, the inverse of a charitable remainder trust, is an irrevocable trust that generates a potential income stream for one or more charities of the donor's choice, with the remaining assets eventually going to family members or other beneficiaries.

Key characteristics

  • Tax benefits vary depending on the type of trust
  • Donors choose the term of the trust and the amount distributed, at least annually, to charity
  • Donors may be able to donate a variety of assets
  • Requires legal setup and ongoing maintenance costs

Details

A charitable lead trust (CLT) is often thought of as the inverse of a CRT. A CLT is an irrevocable trust that provides a fixed amount or a percentage of the trust assets paid to a charity, which can sometimes include a private foundation, for a term of years or for the life of an individual or individuals. The remainder interest is either retained by the donor or given to a non-charitable beneficiary, usually a family member. A CLT is often created for lifetime giving and for estate planning purposes. Generally, the income tax benefits of a CLT may not be as significant as the estate and gift tax benefits, as described below.

The tax benefits of a CLT vary depending on its precise form. For income tax purposes, a CLT can be structured as either a grantor trust, meaning the income earned by the trust is taxable to the grantor, or a non-grantor trust, meaning the income earned by the trust is taxable to the trust.

In a grantor CLT, the grantor can take an immediate charitable contribution deduction for the present value of the future income stream, subject to applicable percentage limitations depending on whether a public charity or a private foundation is the beneficiary. However, this benefit is mitigated by the fact that the trust income is taxable to the grantor during the term with no offsetting of future charitable deductions as the amounts are paid to the charity.

In a non-grantor CLT, the income is taxable to the trust as it is earned, and the trust is eligible for an income tax charitable deduction, a very important benefit of non-grantor CLTs.

It is possible to structure the CLT in such a way that there is no value for the ultimate gift to the remainder beneficiaries, as long as a non-grantor charitable lead annuity trust (CLAT) is used. So long as the trust's investments outperform the IRS-assumed rate of return in place at the time the CLT was established, then with carefully calculated lead interest payments, the donor can effectively transfer wealth to his or her heirs with minimal or no gift tax consequence.

Although there can be significant tax benefits to establishing a CLT, the donor should be aware of the potential implications of the generation-skipping transfer tax. If the remainder beneficiaries are or could be the donor's grandchildren, the donor should consult with his or her advisor.