Charitable Lead Trusts

In last month’s blog post, we discussed the basics of charitable remainder trusts (CRTs). This month, we’re focusing on charitable lead trusts (CLTs).

Here are the basics on CLTs and the benefits they can provide to your clients:

What is a CLT?

A CLT is an irrevocable trust created by an individual (the grantor) during their lifetime or after their death, through their will or trust agreement. The CLT makes payments to the grantor’s selected nonprofit organization for a defined period (typically a set number of years or the lifetime of the grantor and/or their beneficiaries), and then distributes the remaining assets to specific individuals or entities named in the CLT document. For example, a client could establish a CLT paying income to a fund at her local community foundation during her lifetime and the lifetime of her spouse, with the remainder being paid to her children.

What types of CLTs are available?

There are four main types of CLTs:

• Grantor charitable lead annuity trusts (Grantor CLATs)
• Grantor charitable lead unitrusts (Grantor CLUTs)
• Nongrantor charitable lead annuity trusts (Nongrantor CLATs)
• Nongrantor charitable lead unitrusts (Nongrantor CLUTs)

Grantor vs. Nongrantor CLTs. The words “Grantor” and “Nongrantor” are tax terms that signal whether or not a client who creates a CLT will be able to reap immediate tax benefits from their gift to the CLT while retaining responsibility for ongoing income tax and/or estate tax liabilities generated by assets held by the CLT.

CLATs vs. CLUTS. CLATs distribute a fixed dollar amount annually to the nonprofit selected by the grantor, while CLUTs distribute a fixed percentage of the asset value annually to the grantor’s selected nonprofits.

(There are other, more complex variations of the four CLT types above, which are outside the scope of this post.)

What are the tax consequences of establishing a CLT?

1. Grantor CLATs. Clients creating Grantor CLATs typically receive an income tax deduction equal to the present value of payments made during the term of the trust to its nonprofit beneficiary (subject to other applicable deduction limits). The amount of this deduction is calculated according to IRS-prescribed rules and interest rates. After the trust has been created, it is still considered property of the grantor for tax purposes, so the grantor is required to pay tax on any investment income it generates. The Grantor CLAT’s assets will generally be included in the grantor’s estate for estate tax purposes after the grantor’s death.
2. Grantor CLUTs. Clients creating Grantor CLUTs generally receive the same tax treatment as clients creating Grantor CLATs – namely, an immediate income tax deduction and a requirement to pay tax on investment income generated during the term of the trust. The Grantor CLUT’s assets will generally be included in the grantor’s estate for estate tax purposes after the grantor’s death.

3. Nongrantor CLATs. Clients creating Nongrantor CLATs do not receive an income tax deduction when they contribute assets to the trust. The assets transferred to the trust become property of the trust for tax purposes, so the grantor typically does not pay tax on the investment income generated by the trust. Rather, the trust pays any tax on investment income, which it can offset with the charitable deductions it receives from making distributions to the nonprofit beneficiary. Assets contributed to Nongrantor CLATs are generally excluded from the donor’s estate for estate tax purposes.

4. Nongrantor CLUTs. Clients creating Nongrantor CLUTs receive the same tax treatment as clients creating Nongrantor CLATs.

What types of clients would be the best fit for a CLT?

While each client’s situation is different, clients who are good candidates for a CLT typically have the following attributes:

• They would like to benefit certain charitable causes.
• They have assets that will greatly appreciate in value in the future, and want to take advantage of a low interest rate environment.
• They are willing to forego current cash flow, and have heirs who can wait until the end of the trust term to receive the trust assets.
• They are comfortable engaging in more complex estate and gift planning.

Need additional assistance?

If you or your clients have additional questions about making gifts to MCF, we would be happy to help! Alison Helland, Director of Donor and Advisor Engagement, can assist you or refer you to another member of our Donor Engagement team to serve as a resource for your specific situation. You can reach Alison via e-mail at ahelland@madisongives.org or via phone at 608-446-5937.

Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.