Charitable Lead Trust (CLT)
The charitable lead trust provides for a gift of the income interest from the property to charity for a term of years (eg.5,10,15,life). After the specified period of time the property either reverts to the donor or passes to a noncharitable beneficiary designated by the donors. A charitable lead trust can provide significant income or estate tax benefits and is often a way to pass property economically to heirs. The income interest for the charity must be in the form of an annuity or a fixed percentage of the value of the trust property determined annually.
A donor is not entitled to a charitable deduction for federal income-tax purposes on the creation of a charitable lead trust. A charitable lead trust in which neither the donor nor the spouse is taxable on the trust income, and which names other family members as the remaindermen affords others benefits. Such a trust allows property to be transferred to family beneficiaries at a low transfer cost and is particularly attractive for property with a high appreciation potential.
A charitable lead trust is practical only for a donor whose family can forgo income from the transferred property during the period of the charitable interest. A charitable lead trust may be established either during the donor's life or through the donor's will.
Benefits of a Charitable Lead Trust:
The Charitable Lead Trust is most often used to make a substantial
charitable gift over time, while passing on assets to children or
grandchildren on the termination of the trust. This frequently makes
possible a larger after-tax legacy for heirs.
A charitable lead trust created in a will can substantially reduce the estate taxes payable at the time of death.
The savings in estate taxes means that family members may receive substantially more than if the property was left to them outright.
If a charitable lead trust is created during a donor's lifetime, generally the income tax is eliminated on the income from the assets placed in the trust.
An Example
Lead Trust (CLT):
Mr. Smith creates a CLT and funds it with income producing securities
currently valued at $250,000 and directs the trust to pay the CFGC
$20,000 a year for the next 15 years. At the end of the trust, the
assets are to be distributed to his children.
At Mr. Smith's death the trust assets have appreciated to $500,000.
These assets can be distributed to his children with no tax at transfer but the assets would retain the cost basis from the trust.
