What is a Charitable Lead Trust? – Naples Estate Planning
A Charitable Lead Trust allows you to produce tax savings that can be utilized by providing to a favorite charity and the family of the person that owns a Charitable Lead Trust. With a Charitable Lead Trust (CLT) at the end of the term, the balance that is left goes to the descendants of the owner, and is free from estate tax. The assets can also stay in a trust, but this depends on what the initial donor set up when they were making the objectives for the assets.
A CLT is a good estate planning method for those that would like to:
- Move a nice sized portion of their estate to their children at some point in time in the future; this will lower the cost to transfer the funds when the need is desired
- Give money to charitable organizations
- Pass on a larger amount of their estates to their grandchildren or other descendants further down the line without the need to pay the generation-skipping transfer tax that can be required otherwise.
There are two types of CLTs that can be obtained. First, there is the Charitable Lead Annuity Trust (also known as CLAT) and Charitable Lead Unitrust (also known as CLUT). In a CLAT, the amount that has been paid out to a charity is based on a certain percentage of the original fair market value of the contribution that is made by the donor. The donor gets to select the percentage amount when they create the CLAT. With the CLUT, the person making the donation chooses a certain percentage the fair market value of the CLUT assets that the charitable beneficiaries are going to receive, but the payment amount is predetermined every year. This is based upon the fair market value of the CLUT. If CLUT grows by more than the specified unitrust percentage then the beneficiaries share in the growth; and it works the same way for a decrease in value of the CLUT assets as well. There are different tax consequences for the CLAT and the CLUT; the estate planning goals of the donor will generally decide the type of CLT which is most helpful.
Whether the person making the donation chooses a CLAT or a CLUT, there is always a taxable transfer being made. The donor receives a gift tax charitable deduction for the amount of the transfer that is attributable to the charitable beneficiaries. The gift tax return must be filed and a small gift tax may be payable depending on the amount the beneficiaries receive. The taxable gift is calculated by taking the present value of the payments being made to the charitable beneficiaries over the term of the CLT.
There are specific tax reasons for having a CLT. Generally it’s not to get a charitable income tax deduction. Doing this would risk inclusion of a portion of the CLT assets in the estate of the donor upon their death.
For many, having a CLT gives them the opportunity to plan. If you want to benefit a charitable organization or more than one all the while making a tax-advantaged gift to your family, we urge you to learn more about Charitable Lead Trusts.