Charitable Lead Trusts: How to Effectively Utilize

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Paul Sundin, CPA

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Charitable Lead Trusts (“CLT”) are often viewed as the opposite of a charitable remainder trust. The grantor transfers property to the CLT, which makes annual payments to a charity (either fixed amounts or a fixed percentage of the trust property annually for a specified period). At the end of the specified term, the remaining trust property is distributed to the trust’s remainder beneficiaries, typically the grantor’s children or grandchildren. A CLT can be created either during the grantor’s lifetime or at the time of the grantor’s death.

There is no tax deduction available to the grantor upon the creation of the CLT. However, the grantor will be allowed a gift or estate tax charitable deduction for the present value of the annual payments to be made to the charity. Unlike a charitable remainder trust, a CLT is not exempt from income tax and will be required to pay income taxes if its income exceeds its distributions to charity in any given year.

Generally, a CLT is helpful to fulfill a grantor’s charitable intent and obtain a discount on the transfer that will ultimately go to the remainder beneficiaries. Transfer tax costs are minimized primarily because any appreciation in the value of the CLT property after creating the trust is not subject to gift or estate taxes. It is also possible to leverage the grantor’s generation-skipping transfer tax exemption by naming grandchildren as the remainder beneficiaries of the CLT.

CLTs tend to be most prevalent during times of low-interest rates because the lower the interest rates used in calculating the value

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