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CHARITABLE
LEAD TRUSTS (CLTs)
A
Charitable Lead Trust is a powerful way to make a
future transfer of assets to your heirs at a significantly
reduced gift and estate tax cost, while also supporting
your charity with income. During a specified number
of years, the lives of one or more individuals, or
a combination of the two, all contributions are paid
to the charity of your choice. At the end of the trust
term, the assets pass to beneficiaries named by the
donor. The donors choose the trustee.
You
can fund a CLT with cash, publicly traded securities,
closely-held stock, income-producing real estate,
partnership interests, or a combination of the above.
You can establish a CLT during your lifetime, or as
a testamentary trust through your will. A lead trust
may be structured to provide a fixed dollar contribution
annually (CLAT) or a fixed percentage contribution
(CLUT).
Two
Types of Lead Trusts
There are two basic types of Lead Trusts: Non-Grantor
and Grantor.
In
a non-grantor CLT, the most common type, the
trust assets revert to your children, grandchildren,
or other heirs at the end of the trust term. A non-grantor
CLT provides a gift tax charitable deduction and is
useful in reducing the cost of intergenerational wealth
transfers.
In
a grantor CLT, the trust assets revert to you,
rather than to your heirs, at the end of the trust
term. Donors creating grantor CLTs receive a large
charitable contribution income tax deduction. Such
a gift structure may be particularly useful if you
wish to make a multi-year pledge and accelerate future
deductions into the current year.
What
Are The Advantages of a Non-Grantor CLT?
For people who have significant assets, a CLT provides
gift and estate tax relief:
- You
receive a charitable gift tax deduction for the
present value of the annual trust payments to
the charity. The amount of this gift tax deduction
is typically a large percentage of the total assets
contributed to a CLT, leaving only a small portion
of the gift amount subject to the gift tax.
- Because
the gift tax deduction and the amount subject
to gift tax is determined at the time the assets
are contributed to the CLT, any appreciation of
the assets that takes place during the term of
the trust is not subject to additional gift or
estate tax. As a result, the amount that you ultimately
transfer to your heirs may be much larger than
the amount upon which the gift tax is imposed.
- None
of the income earned by a CLT is taxable to the
grantor; therefore, the grantor also does not
receive a charitable income tax deduction. In
effect, this results in a reduction of your taxable
income over the trust term.
- The
assets you contribute to a CLT are removed from
your taxable estate, reducing your estate tax
exposure.
- Unlike
most other gift planning arrangements, the benefits
of a CLT are immediate to the charity. Payments
from a CLT can be used to fund operating costs
and other programs as well as endowed funds.
How
Do I Create a CLT?
Donors establishing a CLT should be advised by an
attorney who is experienced in the area of charitable
trusts and estate planning. Please contact
us by phone or e-mail so that we can assist you
or use our response/request form.
Return
to story on Charitable Lead
Trusts.
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