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Charitable Lead Trust (CLAT and CLUT)

A Charitable Lead Trust (CLT) is an irrevocable trust created by the donor, who contributes assets such as cash or marketable securities to the CLT.  The CLT gives a charity the right to receive funds for a fixed number of years, after which the funds pass to family members.  The charity can be a private family foundation, donor-advised fund, or another charity of the donor's choice.  The amount payable to charity can be either a fixed dollar amount each year (charitable lead annuity trust or CLAT), or a percentage of the value of the assets as re-determined each year (charitable lead unitrust or CLUT).  Usually, a CLT is used to pass assets to family members at a reduced gift tax cost, while benefitting a charity.

A CLT can provide either income or estate and gift tax benefits to individuals with a desire to fund charitable organizations.

Income Tax Benefits

A CLT can be set up during the donor's lifetime, or on the donor's death.  If the CLT is set up during the donor's life as a grantor trust for income tax purposes (so the donor is taxed on the income earned by the trust each year), then the donor can claim an income tax deduction when the trust is funded, but the donor will not get an income tax deduction as distributions are made to charity.  If the trust is not set up as a grantor trust for income tax purposes, then the donor gets no income tax deduction when the trust is funded, but distributions to charity from the trust will be deductible against the trust's income.

Estate Tax Benefits

If the donor's primary goals is to transfer assets to family members while potentially using little or none of the donor's lifetime federal estate and gift tax exemption, a nongrantor trust is typically recommended.  There is no initial income tax deduction when the donor makes the initial gift to the CLT, but the donor gets a charitable deduction against the value of the assets that will pass to family members when the CLT term ends.

In addition, the donor doesn’t pay income tax on the CLAT income.  The tax is paid by the trust, which receives a charitable deduction each year for the amount paid to charity from the CLAT.

Creating CLT at Death

A CLT may also be set up under a revocable living trust or Will.  The decedent's estate gets an estate tax deduction for a portion of the assets going into the trust.  The amount of the deduction will depend on what kind of CLT (unitrust or annuity trust) is used, the payout rate, interest rates when the trust is funded and the length of the charitable term.  

 

A CLT works well if the donor has assets which are likely to increase in value far faster than the IRS assumed rate of interest, or if valuation discounts can be claimed to reduce the value of the assets going into the CLT. 

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