Charitable Lead Trust
A Charitable Lead Trust (CLT) is a type of irrevocable trust that allows a grantor (the person creating the trust) to provide financial support to one or more charitable organizations for a specified period, after which the remaining assets in the trust are distributed to the grantor’s designated non-charitable beneficiaries, typically family members.
The CLT is structured in a way that provides regular payments, often annually, to the chosen charity or charities during the trust term. After the trust term ends, the remaining assets are distributed to the non-charitable beneficiaries, such as the grantor’s children or grandchildren.
There are two main types of Charitable Lead Trusts:
- Charitable Lead Annuity Trust (CLAT): In a CLAT, the trust pays a fixed amount (annuity) to the designated charity or charities each year, regardless of the trust’s investment performance. The amount is usually determined as a percentage of the initial fair market value of the assets contributed to the trust.
- Charitable Lead Unitrust (CLUT): In a CLUT, the trust pays a variable amount (based on a fixed percentage) to the designated charity or charities each year, which is determined by the annual fair market value of the trust’s assets. This means that the payments to the charity can increase or decrease based on the trust’s investment performance.
Charitable Lead Trusts offer several benefits, including:
- Tax benefits: CLTs can provide significant tax benefits for the grantor, as the value of the charitable interest can be deducted from the grantor’s taxable estate. This can help reduce potential estate and gift tax liabilities. Additionally, the trust assets may appreciate over time, potentially allowing the non-charitable beneficiaries to receive more than the original amount contributed to the trust.
- Philanthropic goals: CLTs enable the grantor to support their favorite charitable organizations during their lifetime, or for a specified period, while still providing for their family members in the future.
- Asset protection: Since CLTs are irrevocable trusts, the assets contributed to the trust are generally protected from the grantor’s creditors, ensuring that the intended beneficiaries ultimately receive the remaining assets.
It is important to note that the creation and administration of a Charitable Lead Trust can be complex and requires careful planning. Consulting with an experienced estate planning attorney and a tax advisor is essential to ensure the trust is structured correctly and achieves the desired goals.
Example of a Charitable Lead Trust
Let’s consider a hypothetical example to illustrate how a Charitable Lead Trust (CLT) works:
Sarah is a successful entrepreneur with a net worth of $10 million. She is passionate about supporting education and wants to make significant donations to her favorite charity, the ABC Education Foundation, while also leaving a substantial inheritance for her two children.
Sarah decides to create a Charitable Lead Annuity Trust (CLAT) by transferring $2 million worth of assets, including stocks and bonds, to the trust. She sets the trust term for 20 years and specifies that the trust will pay 5% of the initial trust assets ($100,000) annually to the ABC Education Foundation.
During the 20-year trust term, the CLAT makes annual payments of $100,000 to the ABC Education Foundation, totaling $2 million in donations. The assets in the trust are invested and appreciate in value over the 20 years.
At the end of the 20-year term, the remaining trust assets, which have appreciated to $3 million due to sound investment management, are distributed to Sarah’s two children.
Benefits of the CLAT in this example:
- Tax benefits: Sarah receives an upfront charitable income tax deduction for the value of the charitable interest, which can be spread over five years. In addition, the $3 million remaining in the trust at the end of the term will not be included in her taxable estate, reducing potential estate tax liabilities.
- Philanthropic goals: By creating the CLAT, Sarah ensures that the ABC Education Foundation receives $100,000 annually for 20 years, supporting the charity’s mission and programs.
- Asset protection: The assets in the CLAT are protected from Sarah’s creditors, ensuring that her children receive the intended inheritance at the end of the trust term.
This example demonstrates how a Charitable Lead Trust, specifically a Charitable Lead Annuity Trust, can be used to support a donor’s philanthropic goals while providing tax benefits and preserving assets for their family members.