What is a Charitable Lead Trust?

A charitable lead trust (CLT) is a trust where assets are transferred to a trust for the benefit of a charitable entity.  The CLT then makes payments to one or more charities for fixed duration of time or for the lifetime of a selected individual.  When the CLT’s term ends, the remaining assets are transferred to non-charitable beneficiaries, typically the grantor’s children and grandchildren or trust set up for their benefit. The CLT is the opposite of a charitable remainder trust (CRT).  A CRT can provide a stream of income for the during the trust’s term.  When the term ends, the remaining funds are distributed to selected charities.  Both the CLT and CRT can provide an additional benefit in the form a tax deduction. 

How Does a CLT Work?

1. The grantor contributes assets to an irrevocable trust establishing the CLT and selects the term (fixed period or for duration of the life of one or more people).    The grantor may, depending on the type of CLT selected, be eligible to take a partial tax deduction.  The tax deduction calculation considers the trust’s term, the projected lead payments, and the IRS interest rate used to assume a specific rate of trust asset growth. 
2. Payments are made from the CLT to the selected charity or charities.  Charitable remainder trusts have more limited terms than CLTs. A charitable remainder trust’s term, if you choose the limited term option instead of using a beneficiary’s lifetime, is limited to 20 years.  CLTs that use a fixed term are not subject to this 20-year limitation.  The amount the CLT must pay the charitable entity is also flexible as there is no minimum or maximum payment amount, as long as, payments are made each year.
3. When the term expires, the remaining assets are distributed to the non-charitable beneficiaries (typically children, grandchildren or trusts arranged for their benefit). 

What are the Two Types of CLT?  

1. A CLT with a unitrust payment, which is referred to as a charitable lead unitrust or a CLUT.  The charity receives a fixed percentage of the net fair market value of the CLUT’s assets that are revalued each year. 
2. A CLT with an annuity payment, which is referred to as charitable annuity lead trust or CLAT.  Here the charity will receive an annuity payment that is either
   1. A fixed amount; or
   1. A fixed percentage of the initial fair market value of the property that is initially transferred into the trust based on the Internal Revenue Code Section 7520 rate that exists in the month that the trust is created. 

What’s the Difference Between a Grantor and Non-Grantor Charitable Lead Trust?

A grantor charitable lead trust allows the grantor to take an immediate income tax charitable deduction for the present value of the future payments that will eventually be made to the charity.  There are, of course, deduction limitation that apply depending on whether the beneficiary is a public charitable entity or a private foundation. With a grantor CLT, the trust’s income is taxable to the grantor during the term.

With a non-grantor charitable lead trust, the trust itself—not the grantor—is the owner of the trust assets.  The grantor cannot take an income tax deduction for the amounts paid to the charitable entity. The trust itself pays tax on undistributed net income and is allowed to claim an unlimited income tax charitable deduction for payments to a charitable beneficiary.

Where can I get more Information?

Setting up a charitable lead trust requires the assistance of a qualified estate planning attorney. Call the Law Office of Jonathan Alexander at (949) 334-7823 to learn whether a CLT is the correct option for you and your estate plan.  Mr. Alexander has 20 years of legal experience and can help you create an estate plan that protects you, your family and your legacy. 

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