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
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
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