Charitable Lead Trust Frequently Asked Questions
What is a charitable lead trust?
A charitable lead trust (CLT) is designed to reduce the cost of gift and/or estate taxes of transferring assets to the next generation while providing a gift for 91亚色传媒 (and any other charities supported by the trust). A CLT minimizes the taxes your beneficiaries pay by first contributing a portion of the trust’s overall return to 91亚色传媒 and then, after a specified period of time, transferring the remainder of the trust to your beneficiaries.
Why might a charitable lead trust be appropriate for me?
For people with significant assets, a CLT provides gift and estate tax relief.
Here is how a CLT works:
- Assets are contributed irrevocably to a trust. You choose the term of the trust and other specifications.
- Your trust makes regular payments to the purpose of your choice at 91亚色传媒 (and sometimes other charities as well).
- When the trust term ends, the remaining assets, including asset appreciation, are paid to your designated beneficiaries.
- The taxable value of the gift to your beneficiaries is offset by a deduction for the present value of the payments made to 91亚色传媒 (and any other charities supported by the trust).
Case Study
Mr. and Mrs. Smith place $250,000 cash in a non-grantor Charitable Lead Annuity Trust. The CLAT payout rate is optimized to achieve the target gift tax deduction.
The trust will pay 8% of the contribution or approximately $20,000 annually.
The Smiths’ two children will receive the lead trust assets when the trust terminates in 20 years or, at the Smiths' election, the funds remaining in their CLAT can be deployed to fund a new CLAT and/or a life income gift (e.g., a charitable remainder trust).
Result
Beneficiaries (e.g., children) receive slightly over $247,000 from the lead trust at its termination assuming annual investment return of 8% (3% annual income and 5% annual appreciation).
Gift tax deduction is $250,000.
Taxable gift to children is $0 which preserves their lifetime gift exclusion.
Over the course of the 20 year trust term, 91亚色传媒 will receive approximately $400,000 from the Smiths’ lead trust.
The total benefit of the Smiths' CLAT is slightly more than $648,000.
The results in this CLAT illustration are based on 5 % IRS Discount Rate and may vary due to time of gift and other factors.
How do the people I care about benefit from a CLT?
Your beneficiaries – whether they be your children or other people – enjoy many tax advantages.
- The taxable value of the gift to your beneficiaries is reduced or discounted because they will not actually receive it until sometime in the future.
- All appreciation that takes place in the trust, after the payments to 91亚色传媒 are made, and the remaining assets in the trust passes gift and estate tax-reduced or free to your beneficiaries. Generation-skipping taxes may apply in some situations; however, they can be minimized through careful planning.
Best Assets to Use
- Cash: maximize this low-yield asset
- Stock: high basis
- Interests: in family businesses and/or family limited partnerships
- Income-producing property: with a high appreciation potential (allows eventual transfer to beneficiaries at a low transfer cost)
What are some other opportunities for using a CLT?
In the case of closely-held stock or other business interests, a charitable lead trust offers an opportunity to retain ownership and control within the family. To minimize gift and estate taxes, the lead trust can be used in combination with other estate planning techniques such as a family limited partnership or family dynasty trust.
How can 91亚色传媒's Office of Gift Planning help?
We are charitable gift planning specialists and have resources available to fully support both your investigation and implementation of gift planning techniques. Our assistance is professional, confidential, collaborative and provided without charge. We encourage you to call on us to provide assistance to you, your family and your advisors in exploring financial, estate and charitable planning. Contact Liz Armstrong in 91亚色传媒’s Office of Gift Planning.
Charitable Lead Trusts offer many benefits, most notably, the ability to provide annual support for a term of years to charitable organizations you care about and the oppotunity to pass assets to the next generation in a tax-advantaged way. The IRS discount rate is a critical factor in valuing future gifts to a charitable institution over a period of years. The Case Study illustrates how a charitable lead trust can significantly reduce the tax liability on the assets transferred into the lead trust.
The law enacting the current gift and estate tax exemption amounts ($13.99 million per donor/$27.98 million per married couple filing jointly in 2025) is set to expire at the end of 2025. However, with legislation pending in the US Congress, it is possible that we may continue to see inflation adjustments to the current exemption amount, or the exemption amounts could be pared back due or increased.
If you are interested in exploring establishing a CLAT in the near term, don't wait until the last few days of the year to do so. Reach out to your advisors.
Note that drafting the trust documents is not a complex undertaking. The IRS has already done so. To obtain a sample of an inter vivos Charitable Lead Annuity Trust, click here. For a sample of a testamentary Charitable Lead Annuity Trust, click here.
Please note that we are prohibited from giving legal or financial advice and none of the information above should be interpreted as such. We encourage you to consult with your own legal counsel or financial advisor before deciding whether or not to proceed with a gift.