ADVANTAGES OF WORKING
WITH US

GIFTS FROM WILLS AND REVOCABLE LIVING TRUSTS

LIFE INCOME AND OTHER GIFTS

MEMORIAL GIFTS

RECOGNIZING YOUR GIFT

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Charitable Funds
Glossary
 

CHARITABLE LEAD TRUSTS SIMPLIFIED

In basic terms, a Charitable Lead Trust (CLT) is a legal entity created by a donor to make payments to charity each year for a number of years before distributing to one or more individuals what remains of the trust’s assets. A CLT is ideal for donors who have two primary objectives:

Even though it is possible to structure a CLT as a “unitrust” (i.e., one that pays to charity each year a fixed percentage of the value of the trust’s assets for the year in question), donors often choose an “annuity trust” structure, in which the amount paid to charity is the same from one year to the next. The duration of a CLT may be measured either by the lifetime(s) of one or more people or by a particular number of years. The higher the trust’s payout rate throughout the duration selected, the larger the gift tax charitable deduction to which the donor will be entitled. A corollary of this is the fact that for any particular amount the donor wishes to have paid to charity each year, the higher a CLT’s payout rate, the lower the amount the donor must transfer to the trust at the time the trust is established.

Typically, the people who eventually benefit from a CLT are the donor’s children, and they receive whatever remains of the trust’s assets once the trust has run its course. If the donor instead names as remainder beneficiaries of the trust grandchildren or other heirs with respect to whom a generation has been skipped, then Generation Skipping Transfer Tax may apply.

In addition, donors generally try to identify assets that are likely to increase in value during the time the trust is in existence. If that increase actually does occur to a sufficient extent, then, when the trust ends, the heirs will receive assets that will be worth more than they were at the time the trust was established. Even if what is distributed to heirs comes to less than what was transferred to the trust initially, the result may still be rewarding, taking into account the gift or estate tax savings. (Of course, when the heirs sell what they receive from the trust, any capital gain on which they will be taxed will be calculated by taking into account the cost basis of those assets at the time they were acquired by the trust.)

A CLT will usually be of value only to donors whose level of wealth is such that they need to be concerned with the federal gift tax, which currently applies only to transfers totaling in excess of $5 million over the course of a donor’s lifetime. CLTs are sometimes established upon a donor’s death, in which case there are estate tax savings rather than gift tax savings. It is even advisable in certain relatively rare circumstances for a charitable lead trust to be structured to provide income tax benefits to the donor.

Nevertheless, for a donor who wants to experience the satisfaction of witnessing his or her philanthropy during their lifetime, establishing a CLT now can be a wise decision. The gift tax savings the donor realizes are attributable to the fact that heirs, who will eventually benefit from the trust, will be required to wait for a period of time before receiving distributions from the trust. Moreover, sometimes such a waiting period can be very appropriate. For example, children who may be too young to own and manage certain property now can often acquire the necessary maturity during the time a charitable remainder trust is in existence.

In any event, the payments received from a CLT by the Community Foundation can be used in a variety of ways.

 
Life Income And Other Gifts