Do you tend to temporarily donate property to a charity without permanently giving it up? Then, consider the advantages of a charitable lead trust (CLT). Compared to a more well-known option, the charitable remainder trust (CRT), this kind of trust is practically the reverse.

With a CLT, your family members eventually take ownership of the property, not the charity. In addition, for a period of years, the CLT gives the charity a stream of yearly money.

A charitable lead trust in action

CLT funding can occur during your lifetime, or the creation of a testamentary trust can come from your will or other estate planning documents. The trust is irrevocable either way. You can include this strategy to accommodate altruistic goals in your estate plan.

Although the technicalities can be challenging, the fundamental idea is relatively straightforward. Typically, you donate assets to a trust created to last for a certain period. Then, the charities chosen as income beneficiaries receive payouts during the trust term.

Payments are made as set annuity payments or a portion of the trust, depending on the CLT’s structure. When the trust term expires, the remaining assets go to the beneficiaries.

Charitable deduction implications

The ability to deduct current taxes for the value of the residual interest is one of the critical benefits of a CRT. Nevertheless, let’s suppose you utilize a CLT. Whether a grantor or nongrantor trust, your deduction can be restricted or nonexistent.

Subject to any relevant deduction restrictions, you can use a grantor CLT to claim a current deduction for the present value of future payments to the charity beneficiary. However, the trust’s investment income is taxable to the grantor during the term. That is a drawback to this arrangement.

Conversely, if the CLT is a nongrantor trust, the trust itself is the owner of the assets, not the grantor. The trust is, therefore, responsible for paying any taxes owed on the undistributed revenue. As a result, the trust, but not the grantor, can claim the charitable deduction for distributions to the charitable organization. Although every case is unique, the income tax obligation that will follow for a grantor trust will frequently be more than the advantages of the current tax deduction.

Note that a correctly drafted CLT will result in a gift or estate tax deduction for the value of the trust’s charitable remainder. Therefore, it is possible to transfer a remainder interest to family members at a relatively low tax cost.

The ins and outs 

For a set time, the lifetime of one or more people, or a combination of the two, the CLT must make yearly payments to at least one chosen charity. Unlike a CRT, there’s no mandatory timeframe of 20 years, nor does the trust have to impose maximum or minimum requirements each year. The remainder passes to the specified beneficiaries named at the outset when the trust period ultimately expires.

Do you qualify for a CLT? Depending on your situation. Contact our RRBB accountants and advisors to talk about this possibility.

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