Overview. In large estates, the estate tax can result in the liquidation of hard-to-sell assets (such as family businesses), often resulting in "fire-sale" prices, which reduce even further the net distribution to the family or other beneficiaries. Estate liquidation can result in losses that make the estate tax seem higher than it really is.
A charitable lead trust (CLT) is usually designed as a trust for a term of years, and during the trust term a specified annual payment (based on a percentage of the value of trust assets) is paid to one or more designated charitable organizations. The settlor (creator of the trust) specifies the charitable organizations as the "lead" beneficiaries and children or other beneficiaries as the "remainder beneficiaries", who will receive the trust assets at the end of the trust's term.
A CLT can be a charitable lead unitrust (CLUT) or a charitable lead annuity trust (CLAT).
A CLUT pays a specified percentage of the current trust value (as revalued each year) to one or more qualified charities. The amount must be paid annually, but it can be paid more frequently.
A CLAT pays the percentage as a guaranteed annuity based on the value of the assets at the time of the trust's creation.
Although the specified payments are made to one or more charities during the trust's term, the asset itself is preserved for the children. While the children may have to wait 5, 10, 15, or even 20 years in order to benefit from the trust's assets, it is often the best way to pass some assets to the children without the combined effects of estate taxes and asset liquidation costs. The longer they wait, the lower the value of the remainder interest is for gift- or estate- tax purposes.
A CLT can be established during life or after death.
For a CLT established during the settlor's lifetime, there is a charitable deduction for income tax purposes triggered by the contribution of assets to the trust; however, the settlor later has to report trust income in subsequent years because a CLT is designed as a grantor trust for income tax purposes. This can produce little or no tax savings, but that could be different if the trust is created high-bracket year, and the taxes are paid in low-bracket years. Of course, this could be made better or worse, depending on tax-rate reductions or increases.
The creation of a charitable lead trust results in a gift to the noncharitable remainder beneficiaries based on the present value of the remainder interest. That value — which is determined from the IRS-published interest rates and tables — depends on the term of the trust and the rate or amount of the specified payment going to the charitable organization(s). It is possible to design a charitable lead trust so that the remainder interest has little or no value for gift or estate tax purposes.
For a CLT established upon the settlor's death, there is a charitable deduction for estate-tax purposes triggered by the contribution of assets to the CLT. In other words, the present value of the remainder interest is subject to the estate tax, and the value of the "lead" interest generates a charitable deduction.
While a standalone trust document for the CLT is common, the terms of the CLT can be incorporated into a revocable trust or into a Will if the CLT is not going to exist until after death.
Contact Us. For more information or to meet with an affiliated member of our planned giving team, please contact:
J. Russell, Raker, III, PhD, ACFRE
Associate Vice President
Office of Institutional Advancement
Nevada State College and Foundation
1125 Nevada State Drive, Henderson, NV 89002
Office: (702) 992-2356
Fax: (702) 992-2351