A Charitable Lead Trust (“CLT”) is specialized trust arrangement where the donor irrevocably transfers assets to a trust. The trustee invests and manages the trust assets and makes the payments to the charity. At the end of the trust period, the trust assets are distributed to either the donor, to the donor’s children, grandchildren or other heirs. The CLT approach entitles the donor and/or the trust beneficiaries to receive one or more forms of tax savings.
The trust is typically prepared by the donor’s lawyer (for a fee) or by the trust department of a bank or trust company (most often for no separate fee). The trust is supervised by a trustee who oversees the implementation of the trust’s terms and is typically the donor or a third party such as a bank or trust company. The trust terms include the trust’s commencement date, payment intervals and amounts, management of the trust assets, and its termination. The investment of the trust assets and financial advice is usually done by the trustee or by a separate financial advisor with discretion or according to specific directions from the trustor.
The unique tax savings benefits associated with the CLT (estate-, gift- and/or income-tax) are geared to the donor’s circumstances and require conformity to certain formats involving a two-fold process:
First, whether the trust assets are to be returned to:
The donor (“grantor charitable lead trust”); or
The donor’s heirs (“non-grantor charitable lead trust”).
Second, whether the payments to the charity are:
Pays a fixed dollar amount yearly (“charitable lead annuity trust”); or
Pays a fixed percentage of trust assets revalued annually (“charitable lead unitrust”)
BASIC EXAMPLES OF CLTS
Charitable lead annuity trust: Donor transfers cash, publicly traded securities, closely held stock and real estate to a lead annuity trust that pays a fixed amount each year for a fixed period of years or the life of one or more persons. At the end of the trust, the assets are returned either to the donor (grantor charitable lead annuity trust) or to heirs (non-grantor charitable lead annuity trust).
Charitable lead unitrust: Donor transfers cash, publicly traded securities, closely held stock and real estate to a lead unitrust that pays a fixed percentage of the trust assets valued each year for a fixed period of years or the life of one or more persons. At the end of the trust, the assets are returned either to the donor (grantor charitable lead unitrust) or to heirs (non-grantor charitable lead unitrust).
Where It Works
Donor wants to make a present gift of income
Donor wants trust asset returned personally or to beneficiaries
Donor discretion for income tax deduction (grantor trust) or
estate tax deduction (non-grantor trust)
Donor willing to accommodate complexity
Donor or beneficiaries may receive appreciated asset free of gift or estate tax
Donor receives philanthropic recognition
Charitable Lead Trust
A Charitable Lead Trust (“CLT”) is specialized trust arrangement where the donor irrevocably transfers assets to a trust.