Understanding the Charitable Lead Trust

One person is answering a yes or no question if he knows what a charitable lead trust is.

If you’re considering a charitable lead trust (CLT), it’s important to know the array of options you have and decisions you will need to make.

Presented by: Chris Powers, CFP®, AIF®, AEP®

Starting with the basics, a charitable lead trust (CLT) is an irrevocable trust that allows donors (called grantors) to give money or property to fund an income stream to charity for a term of years while also retaining the rights to the remainder property. Any assets remaining in the trust are distributed to the grantor or other individuals.

What is a Charitable Lead Trust?

CLTs can be created and funded in two ways: during the grantor’s life as an inter-vivos trust, or at death as a testamentary trust. There are two types of CLTs for income tax purposes:

Grantor lead trust. The donor is considered the owner of the CLT assets for income tax purposes, so all income tax liabilities of the trust flow through to the grantor’s personal income tax return. The grantor can take a charitable income tax deduction equal to the present value of the income interest passing to charity. The grantor is typically the remainder beneficiary.
Non-grantor lead trust. This is treated as a separate tax-paying entity subject to trust income taxation. The trust can deduct the payments made to the charitable beneficiary each year to reduce the tax implications. Someone other than the grantor is the remainder beneficiary. The grantor does not receive an income tax deduction when funding the trust but makes a completed gift to the remainder beneficiary and is able to deduct the present value of the income stream going to the charity from the value of the gift. Any appreciation of the assets passing to the remainder beneficiary occurs outside of the grantor’s estate.

Once you’ve decided between a grantor lead trust and a non-grantor lead trust, the CLT can then be established as a charitable lead annuity trust (CLAT) or a charitable lead unitrust (CLUT):

CLAT. This type of trust pays a fixed dollar amount based on a percentage of the initial funding amount to a charity for a specified length of time. It is more suitable if the grantor wants to maximize the benefit to the noncharitable beneficiary and expects the assets in the trust to appreciate over time.
CLUT. This type of trust pays a percentage of the trust’s value, as calculated each year, to the charitable income beneficiary. It is more suitable if the grantor expects the trust assets to decline over the term of the trust, such that revaluing the income payment year to year may result in more assets left for the remainder beneficiary.

The Benefits

CLTs offer a number of benefits. The grantor can donate to a charity while keeping trust assets within the family. The grantor can also control the payment method, term of trust, and beneficiaries, as well as postpone the non-charitable beneficiary’s receipt of the trust assets.

Using a non-grantor CLT helps substantially lessen the value of a taxable gift to the remainder beneficiary by locking in the value of the gift at funding and deducting the value of the charitable income interest from the value of the gift. This is known as an estate tax freeze technique.

Proceed with Caution

CLTs can play a valuable role in a financial plan, particularly when it comes to estate tax planning. They are complex vehicles and require careful drafting to achieve your goals, so it is imperative to work with an attorney.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Chris Powers is a financial advisor located at Global Wealth Advisors 500 N. Loop 1604 E., Suite 250, San Antonio, TX 78232.. He offers securities and advisory services through Commonwealth Financial Network^®, Member FINRA / SIPC, a Registered Investment Adviser. Financial Planning services through Global Wealth Advisors are separate and unrelated to Commonwealth. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network^®. He can be reached at (210) 367-6937 or at info@gwadvisors.net.