Use of a Charitable Lead Trust (CLT)

In a recent post, we discussed the uses of the Charitable Remainder Trust (CRT). A Charitable Lead Trust (CLT) is the opposite of a CRT.

Like a Charitable Remainder Trust, a Charitable Lead Trust can be created when the client/donor contributes appreciated property to the trust. And like a CRT, a CLT can accept any type of property, such as cash, stocks, bonds, real estate, etc. However, while a CRT makes annual payments to the Donor and then distributes the trust assets to the designated charities upon the Donor’s death; a CLT makes annual contributions to the Donor designat-ed charities until the death of the donor and then distributes the remaining assets to the individual beneficiaries selected by the donor. Therefore, a Charitable Lead Trust provides a family wealth transfer, as well as fulfilling the current charitable goals of the Donor.

For incomes tax purposes, a CLT can be drafted as a grantor trust or a non-grantor trust. With a grantor trust, the Donor receives an upfront income tax deduction on the formation of the trust, but is then responsible for the income taxes on the future trust income. With a non-grantor trust, a separate taxpaying trust is created and allowed an unlimited charitable income tax deduction for the income paid to the charity or charities; however, the Donor does not receive a charitable tax deduction on their personal income taxes.

So, should you consider creating a Charitable Lead Trust? Here is one example where a CLT may provide a solution for a Donor. The Donor has a large potential estate tax exposure and wants to support his favorite charity during his/her lifetime. The Donor creates a 10-year Charitable Lead Annuity Trust (CLAT) funded with $5,000,000, which will make annual payments of $500,000 to his/her chosen charity and, upon the Donor’s death, will pay the remainder to the Donor’s son.

The value of the charity’s annuity is calculated pursuant to the actuarial valuations of Section 7520 of the Internal Revenue Code. If we assume that the actuarial value of the annuity on the date of the gift was $3,900,000, the remainder interest payable to the son or the son’s trust is valued at $1,100,000. The Donor and his/her advisor must determine whether it should be a grantor or non-grantor trust. The non-grantor trust may provide the most estate tax benefit to the Donor’s estate. Gift taxes are due based on the value of the remainder interest.

Obviously, the decision for the Donor to use a grantor or a non-grantor trust is complicated and requires signifi-cant services and advice from a tax professional. Also, because of the significant limitations on itemized deduc-tions from charitable giving in the current tax environment, the decision should probably be focused more on the estate tax savings than the income tax benefits. However, every Donor has a different financial, tax and philan-thropic situation.

In another example, a Donor and his/her family are very philanthropic and a charitable organization that they wish to support wants to build a new building that requires the organization to place a mortgage on the building. A CLAT could be created by the Donor to make the mortgage payments. Assuming the mortgage is a 20-year mort-gage, the CLAT would make payments for the 20-year period and the remainder interest would pass to the Donor’s beneficiaries. In this case, a non-grantor CLAT would probably be used since the availability of a current charitable deduction is limited. If the assets contributed to the CLAT are appreciated properties, the income tax gain is avoided and both the philanthropic and the wealth transfer benefits are obtained.

As the above indicates, deciding to use a Charitable Lead Trust is a complicated process and requires significant planning, as well as income and estate tax advice. Stablish Foundation can provide assistance in this process and can act as the trustee for the CLT. We work closely with a Donor’s estate and tax professionals to accomplish their philanthropic and personal objectives and help them to create their Legacy.

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