- Charitable Lead Trust: The opposite of a Charitable Remainder Trust, an irrevocable Charitable Lead Trust generates an income stream for the nonprofit organizations of your choice, with the remaining assets eventually going to family members or other beneficiaries.
- Details: A CLT is often created for lifetime giving and for estate planning purposes. Generally, the income tax benefits of a CLT may not be as significant as the estate and gift tax benefits, as described below.
The tax benefits of a CLT vary depending on its precise form. For income tax purposes, a CLT can be structured as a grantor trust, meaning the income earned by the trust is taxable to the grantor, or a non-grantor trust, meaning the income earned by the trust is taxable to the trust. In a grantor CLT, the grantor can take an immediate charitable contribution deduction for the income interest, subject to applicable percentage limitations depending on whether a public charity or a private foundation is the beneficiary. However, this benefit is mitigated by the fact that the income is taxable to the grantor during the term with no offsetting of future charitable deductions as the amounts are paid to the charity. In a non-grantor CLT, the income is taxable to the trust as earned and the deduction to the trust for the charitable donation subject to the percent limitations described above, a very important benefit of CLTs.
For estate and gift tax purposes, there are other benefits of a CLT. If the contribution to the CLT is made during the donor's lifetime, then they will also be eligible for a gift tax deduction with the interest going to charity. If the remainder beneficiary is not the donor, then the donor could be subject to gift tax on the actuarial value of the remainder interest.
It is possible to structure the CLT so that the gift tax is zero, as long as a certain type of CLT, non-grantor charitable lead annuity trust (CLAT), is used. If the assets in the trust return more than the IRS-assumed rate when the CLT was established, then the donor can effectively transfer wealth to his or her heirs at minimal or no gift tax cost. If the contribution is made at death, the donor will be eligible for an estate tax deduction for the value of the interest passing to charity. As with the gift tax, it is possible to structure the bequest so that there is no estate tax related to the interest ultimately passing to heirs.
Although there can be significant tax benefits to establishing a CLT, the donor should be aware of the potential implications of the generation-skipping transfer tax. If the remainder beneficiaries are or could be the donor's grandchildren, when a distribution from the trust is made to these beneficiaries, the distribution will be subject to this tax unless the donor or the donor's estate is able to allocate the donor's generation-skipping tax exemption to the transfer or bequest. This tax can be significant. If the donor is considering such a transaction, they should consult with their advisor to determine the most effective structure of the CLT to enable the donor to take best advantage of their available generation-skipping tax exemption.