What is a Charitable Lead Trust?
How does it work? What type of client could use one?
(Our second in a multi-part series on advanced estate planning topics)
A charitable lead trust (CLT) is essentially the reverse of a charitable remainder trust. It is an irrevocable trust which provides annual income to a designated charity. The remainder of the trust assets are then distributed to family members of the donor or other designated beneficiaries. CLTs are created for a term of years or to last for the lifetime of one or more people – during which time the charitable payments are made. A CLT can be created during the donor’s lifetime or through his or her will.
Some of the potential benefits of a CLT include estate tax savings, gift tax savings, and possibly income tax deductions.
How a charitable lead trust works
The trust is funded through donor assets for someone’s lifetime or for a fixed number of years. The trust can be funded with real estate, publicly traded stock, cash, and some other assets – if the other assets meet the IRS rules. Payments to the charity can be made in one of two ways:
- A fixed annuity payment. A specific sum is paid on a yearly basis
- A percentage payment called a unitrust payment. Here, a predetermined percentage of the trust’s value is distributed each year.
The distributions can be made more regularly than once a year, but the overall yearly payments must meet the limits created in the trust document.
Creating the trust requires following specific IRS rules. An experienced Arizona charitable trust and estate planning attorney can help guide you through the IRS requirements.
When the trust ends, the trust assets either revert back to the grantor or are distributed to named beneficiaries.
Types of charitable lead trusts
There are two kinds of CLTS which can affect tax issues. There are pros and cons to each type:
- Grantor charitable lead trust. Here, the donor/grantor can take advantage of the income tax charitable deduction – based on the current value of the future payments that will be made to the named charity beneficiaries. Eligibility for the tax deduction and the amount of the allowed deduction may depend on if the charity is a private foundation or a public charity. Any investment income (income generated by the CLT) is taxable to the donor during the lifetime of the trust.
- Non-grantor charitable lead trust. Here, the trust is considered to be the owner of the trust and not the grantor. This means the grantor can’t take the charitable income tax deduction while the charitable beneficiary can. The trust also pays taxes on any investment income.
Some of the benefit considerations include:
- Tax deductions. The donor may be able take a partial tax deduction if they make cash contributions. Stocks may need to be sold first to qualify for the income tax deduction.
- Helping a charity of your choice. You get to help a charity and watch as the charity grows and helps its intended audience. Unlike charitable remainder trusts, there is no time limit on the how long these charitable payments can be made. There’s also no maximum or minimum amount that must be distributed as income – provided the distributions are made on at least a yearly basis.
- Additional tax advantages. The distribution at the end of the trust term may help to reduce or even eliminate other taxes on the amount distributed.
Speak with a knowledgeable Arizona charitable trust attorney about your financial planning needs
At Yaser Ali Law our Tempe Arizona lawyers advise individuals, charities, and businesses about their financial planning requirements. We review who you want to help, what assets you can use to help, and how to help your loved ones and others. Charitable trusts are just one of many ways to address your financial concerns and estate planning desires. Charitable trusts can help minimize taxes while providing direct benefits for yourself, charities, and individuals. To learn more, please phone us at (480)-442-4175 or use our contact form to make an appointment.