By Peter Mastrantuono
Last week we discussed the legacy and retirement benefits of Charitable Remainder Trusts. This week we discuss Charitable Lead Trusts, which offers a different approach for a meeting a unique combination of tax, estate and legacy planning objectives.
What is a Charitable Lead Trust?
Where the Charitable Remainder Trust (CRT) is structured to provide income during a grantor’s lifetime and a bequest to a charity after death, a Charitable Lead Trust (CLT) is an irrevocable trust designed to provide income to a qualified charitable organization (or organizations) for fixed number of years, after which the trust assets are paid to the grantor (the individual establishing the trust) or to the designated beneficiary(ies) of the trust (typically the grantor’s family members). Unlike, a CRT, a CLT is not tax exempt.
There are two basic types of CLTs:
- Grantor Charitable Lead Trust allows the grantor to take an immediate income tax deduction for the present value of the future stream of income payments made to a charity over the prescribed period of time. Because the grantor is considered to be the owner of the assets in a grantor CLT, the trust’s investment income is taxable to the grantor.
- Non-grantor Charitable Lead Trust differs in that the trust is the owner of the trust’s assets, not the grantor, which eliminates the grantor’s eligibility to take a charitable income tax deduction on the income payments to a charity. This is balanced by the benefit of the grantor not being subject to income taxes on the trust’s investment income.
Each of the above CLTs can be structured to be either “reversionary” (i.e., where the trust assets revert to the grantor) or “non-reversionary” (i.e., where the assets revert to beneficiaries other than the grantor, e.g., children). Non-reversionary trusts may result in the grantor having to pay gift taxes.
As with CRTs, a CLT is set up to pay income based on either a fixed percentage of the original trust assets, or on a fixed percentage based on the changes in value of the trust’s assets.
Contributions may be made in the form of cash, publicly traded securities, some types of closely held stock, real estate, and certain other complex assets.
It’s Complicated…
A CLT may be appropriate for individuals seeking to reduce estate taxes, fund a charitable cause, and potentially receive a current income tax deduction. Due to the different tax treatment of grantor and non-grantor CLTs, it is essential that individuals work with their tax advisor to understand the tax implications of each.
CLT planning should always be done in concert with a qualified estate planning attorney to explain the nuances and complexities of CLTs and create the required legal documents.
Your financial advisor plays an important role here as well, helping you assess the impact CLT funding has on your financial plan and managing the trust’s assets responsibly.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
