Charitable Lead Trusts

Charitable Lead Trusts (CLTs): A Strategic Way to Give While Preserving Wealth

In determining which charitable gifting strategy to use, a charitable lead trust may be a good choice for those clients looking to minimize, or even zero out, their estate taxes.

Charitable Lead Trusts (CLTs) are a powerful and flexible estate planning tool that allows individuals to support charitable causes while also benefiting their heirs. At Bridge Law, LLP, we help clients structure CLTs to maximize tax efficiency, philanthropic impact, and wealth transfer. In this article, we’ll explore what CLTs are, how they work, and why they might be an advantageous strategy for your estate plan.

What is a Charitable Lead Trust (CLT)?

A Charitable Lead Trust is an irrevocable trust designed to provide a stream of income to a designated charity for a set term. After this period ends, the remaining assets in the trust are either returned to the donor (in a grantor CLT) or passed to beneficiaries, such as the donor’s children or grandchildren (in a non-grantor CLT). This dual purpose makes CLTs an effective way to balance charitable giving with wealth transfer goals.

The two main types of CLTs are:

1. Grantor CLTs: In a grantor CLT, the donor receives an immediate income tax deduction for the present value of the charity’s income interest. However, the donor is also responsible for paying taxes on the trust’s income during the term. This type is typically used when the donor seeks an immediate tax deduction and is willing to manage the ongoing tax obligations. When the grantor dies, the the assets remaining in the trust are transferred to the non-charitable remainder beneficiaries. These could be family members or other individuals named by the grantor. Since it is a grantor trust, the value of these assets may be included in the grantor’s estate for estate tax purposes.
2. Non-Grantor CLTs: In a non-grantor CLT, the trust itself pays taxes on the annual income, and the donor does not receive an upfront income tax deduction. However, this structure allows the remaining assets, after the charitable term, to pass to the donor’s heirs free of gift or estate taxes, which can significantly reduce tax burdens on wealth transfers. These non-grantor CLTs are generally testamentary and are funded only after the donor passes away.

How Do Charitable Lead Trusts Work?

Establishing a CLT involves transferring assets—such as cash, stocks, real estate, or other appreciated assets—into the trust. The trust then provides a fixed annual payment (for a Charitable Lead Annuity Trust or CLAT) or a percentage of the trust’s value (for a Charitable Lead Unitrust or CLUT) to the chosen charity for the term of the trust.

1. Funding the Trust: The donor contributes assets to the CLT, receiving either an immediate income tax deduction (for grantor CLTs) or estate and gift tax benefits (for non-grantor CLTs).
2. Income Payments: The charity receives annual payments from the trust for a specified term (e.g., 10, 15, or 20 years) or for the donor’s lifetime. The payment can be a fixed amount (CLAT) or a percentage of the trust’s value (CLUT), which is revalued annually.
3. Remainder Distribution: Once the term ends, any remaining assets in the trust are either returned to the donor or distributed to non-charitable beneficiaries (e.g., family members), depending on the type of CLT. If the CLT was written to zero-out, then any assets remaining at the end of the term will pass to the donor’s heirs free of estate taxes.

Benefits of a Charitable Lead Trust

1. Tax Efficiency: CLTs offer several tax advantages depending on how they are structured. A grantor CLT allows for an immediate charitable deduction, while a non-grantor CLT can minimize estate and gift taxes, making it ideal for transferring wealth to future generations with minimal tax impact.
2. Philanthropic Impact: CLTs provide a consistent stream of income to a charity, supporting important causes over time. This can create a lasting legacy and establish the donor’s long-term philanthropic intentions. CLTs are particularly beneficial for individuals who wish to support a charity in perpetuity while also considering their family’s financial future.
3. Preservation of Family Wealth: By using a non-grantor CLT, donors can significantly reduce the taxable value of their estate. The assets that eventually pass to heirs can grow within the trust and be transferred with reduced tax liability, preserving more wealth for the next generation.

CLTs vs. CRTs: Key Differences

While both Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs) are effective for charitable giving and tax planning, they serve opposite purposes:

• CLTs prioritize charitable giving first, with the remainder passing to beneficiaries after the term ends. They are ideal for those looking to reduce estate taxes while maintaining family wealth.
• CRTs prioritize income to the donor or their beneficiaries first, with the remainder going to charity at the end of the trust term. CRTs are often used for individuals who want to secure a steady income while avoiding immediate capital gains taxes on appreciated assets.

Important Considerations When Establishing a CLT

Setting up a CLT involves several considerations to ensure it aligns with your financial and philanthropic goals:

1. Irrevocability: CLTs are irrevocable, meaning once assets are placed into the trust, they cannot be withdrawn or changed. This ensures the charitable intent is honored but requires careful planning.
2. Term Length: The term length of the CLT is crucial, as it determines the period during which the charity receives payments and when the remainder beneficiaries will receive their distribution. A longer term benefits the charity but delays wealth transfer to heirs.
3. Compliance: To maintain tax benefits, CLTs must comply with IRS regulations regarding payouts and the operation of the trust. 

Is a CLT Right for You?

A Charitable Lead Trust is a powerful tool for those seeking to balance charitable giving with wealth transfer goals. It is particularly advantageous for individuals with significant assets who want to minimize estate taxes while supporting meaningful causes. CLTs are also ideal for individuals looking to establish a lasting charitable legacy that aligns with their financial and family objectives.

At Bridge Law, LLP, our experienced estate planning attorneys guide clients through the complexities of establishing and managing CLTs. We work closely with you to create a customized strategy that maximizes tax benefits, ensures compliance, and fulfills your philanthropic vision.

Ready to Start Your Giving Journey?

We offer a one-hour $500 charitable gift journey consultation, where we review for you all of your potential gifting strategies. Learn more about how Bridge Law, LLP can help you leave a lasting impact.