How does it work? What type of client might benefit from using one?
A charitable lead trust (CLT) is the opposite of a charitable remainder trust. An irrevocable trust provides a selected charity with an annual income. The remainder of the trust's assets is subsequently dispersed to the donor's relatives or other beneficiaries selected by the donor. CLTs are established for years or for the lives of one or more beneficiaries, during which charitable contributions are made. A CLT can be established either during the donor's lifetime or via his or her will. Potential CLT advantages include estate tax savings, gift tax savings, and even income tax deductions.
The operation of a charitable lead trust
For a donor's lifetime or a defined number of years, the trust is funded by the donor's assets. The trust can be funded using real estate, publicly traded stock, cash, and other assets if it complies with IRS regulations. The charity accepts payments in one of two ways:
- A constant annuity payment. A specified amount is paid annually.
- A percentage payout is termed a unitrust payment. A specified percentage of the value of the trust is distributed annually.
The distributions may be made more frequently than annually, but the total annual payments must adhere to the limits established by the trust deed. Creating trust involves compliance with specific IRS regulations. An experienced Arizona attorney in charitable trusts and estate planning can assist you through IRS restrictions. At the trust's termination, the assets are either returned to the grantor or dispersed to the named beneficiaries.
Different kinds of charitable lead trusts
Two types of CLTS can impact tax matters. There are benefits and drawbacks to each type:
- A philanthropic lead grantor trust. Here, the donor/grantor can claim an income tax charitable deduction based on the present value of the future payments that will be made to the designated charity beneficiaries. The eligibility for the tax deduction and the amount of the authorized deduction may depend on whether the charity is a public or private foundation. During the trust's duration, any investment income (money created by the CLT) is taxable to the donor.
- Non-donor-directed charitable lead trust Here, the trust, not the grantor, is deemed the trust's owner. This means the grantor cannot claim the charitable income tax deduction, although the grantee can. Additionally, the trust pays taxes on any investment income.
Among the benefits to consider are the following:
Tax exemptions Cash contributions may qualify for a partial tax break for the donor. To qualify for the income tax deduction, stocks may need to be sold first.
Contributing to a cause of your choosing. You can add a charity and observe it as it grows and assists its intended beneficiaries. In contrast to charitable residual trusts, there is no time limit on the duration of these philanthropic payments. Additionally, no minimum or maximum amount must be delivered as income so long as distributions are paid at least annually.
Additional tax benefits The distribution after the trust's term may decrease or eliminate other taxes on the dispersed amount.