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Wealth Management > Financial Planning > Charitable Lead Trusts

  • Charitable Lead Trusts

    A Charitable Lead Trust (CLT) allows you to designate charities to receive an income stream during the term of the trust. At the end of the term, the ultimate beneficiaries are your heirs. In this sense, a CLT is basically the opposite of a Charitable Remainder Trust (CRT).

    One of the main benefits of establishing a CLT is that the eventual transfer of the assets to your heirs will be made at a significantly reduced gift or estate tax cost. The reason for this circumstance is that your heir must wait until the end of the term of the trust before receiving the assets. The value of the gift is the estimated present value of the future gift, not the current market value. If the rate of growth on the investments exceeds the income paid to the charity, the value of the assets inside the trust will grow without additional tax being levied against your estate.

    As with the Charitable Remainder Trust, payment to the charities can be in the form of an annuity (CLAT) or unitrust (CLUT). A CLAT pays a fixed dollar amount at least annually to the charity, based on the assets that are initially transferred to the trust. A CLUT pays a fixed percentage rate, varying the payout from year to year because it is based on annual fluctuations in the value of the trust’s property. Since most CLTs are structured as a non-granter trust, the trust is taxed as its own entity and is not taxed as part of your estate.

    Unlike a Charitable Remainder Trust, there is no income tax advantage for the payments made to charities. However, if your current charitable contributions do not allow you to make any further deductions, a CLT may allow you to avoid these limitations. The contributions made by the CLT to the charity will be offset by the CLT’s income. This will not affect your personal limits for deducting contributions.

     

    Advantages

    • Reduce gift or estate taxes
    • Meet charitable goals
    • Avoid charitable contribution limits

     

    Disadvantages

    • Gifts to CLTs do not qualify for the annual gift exclusion
    • No income tax advantage for charitable contributions
    • May need professional assistance to create the trust
    • Complexity and cost to establish and maintain

     

     

     


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