What is a Charitable Lead Trust and How is it Used in Planned Giving?

A charitable lead trust (CLT) is a form of trust that reduces a person’s estate tax by donating a portion of the estate to charity. A CLT can also provide an income tax deduction in some cases. Assets are placed in the trust and the trust makes payments to the selected charity for a specific period of time. After the specified time period, the assets in the trust revert back to the estate of the trust donor or designated non-charity beneficiaries. This provides an income for the charity and tax breaks for the donor and/or his estate.

A charitable lead trust derives its name from the fact that the charity receives its portion of trust assets first. The planned giving attorneys at our Ohio firm refer to this as having the “lead interest” in a trust. By contrast, a charitable remainder trust is a trust in which the lead interest (the trust payouts) goes to the trust’s beneficiaries and the charity receives the remaining assets after the trust’s terms are complete.

Charitable Lead Trusts: Things You Need to Know

Ideal Candidates
As part of a strategy for planned giving, attorneys throughout Ohio and elsewhere may advise a client to use a charitable lead trust when a client has at least $1 million they can afford to put in the trust and enough income to benefit from the full tax deduction potential. If the donor habitually contributes to charity, this solution is even more suitable as the trust payments can be substituted for the donor’s regular contributions so their income or total assets are not reduced further than they would be if a charitable trust were not involved. The best assets for a CLT are cash and high-basis marketable securities.

Annuity Trust vs. Unitrust
Payments from a CLT can either be a fixed amount, which is known as an annuity trust, or a percentage of the trust principal, which is known as a unitrust. Annuity trusts, with a fixed payment amount, the most popular because the donor knows exactly how much the charity will receive.

Grantor or Non-grantor Trust
When setting up the charitable lead trust, the donor (or grantor) must decide whether the assets remaining at the end of the trust terms will revert back to him or her or whether they will be transferred to one or more beneficiaries. If the assets return to the donor, it is known as a grantor trust. If they are passed to other beneficiaries, it is known as a non-grantor trust.

Benefits of a Charitable Lead Trust

A CLT grants four primary benefits:

1. Deductions from federal gift and estate taxes for the total amount of trust payments made to the chosen charity
2. Income tax deductions for some non-grantor trusts
3. Appreciation of the trust assets is not subject to gift or estate taxes when they are transferred to the beneficiaries after the trust’s term is complete – though they will be subject to capital gains taxes
4. Once assets are placed in the trust, a management company can handle administration of the trust and investment of the assets, so the donor is not burdened with these tasks. Many charities who are equipped to receive funding through trusts have their own management team to help donors with this.

Disadvantages to a Charitable Lead Trust

1. A CLT is an irrevocable trust. Once assets are transferred to the trust, they cannot be removed from the trust until the term of the trust is complete. This ensures that the charity receives all that it was promised. Upon termination of the trust, the assets are transferred according to the directive established upon creation of the trust. If it is a non-grantor trust, the assets will never revert back to the donor.
2. Value of the assets could go down, leaving heirs with less than the donor intended in some cases. For this reason, market timing is essential to ensure the trust is established when interest rates are favorable.
3. Assets transferred to heirs at the end of the trust are taxable as a gift and will lower the donor’s estate tax exemption.

Is a charitable lead trust right for you?

The Ohio planned giving attorneys of Gudorf Law Group, LLC, can help you determine whether a CLT is right for you and assist with other aspects of planned giving. Our attorneys in Ohio are available for a free consultation by calling 1-877-483-6730.