Charitable donors are frequently in pursuit of a means for establishing a lifetime philanthropic legacy and effective estate planning. The utilization of a charitable trust provides a strategic option. The donor may choose to set up a trust during his or her lifetime (termed an “inter vivos” trust) or a trust set up to take effect upon death under a will (termed a “testamentary trust”).
The Charitable Lead Trust (“CLT”) generates an income stream (the charitable lead interest) payable to one or more qualified charitable organizations, with the remaining assets going, after the lead term, to designated non-charitable beneficiaries. Payments may be made in two ways. By the first, a fixed amount, as determined upon the creation of the trust, is payable annually to at least one charity (an “Annuity Trust” or “CLAT”). In the second, a fixed percentage of the net fair market value of the trust assets, valued annually, is paid to at least one charity (a “Unitrust” or “CLUT”).
Another variety of charitable trust is the Charitable Remainder Trust, which provides payments to non-charitable beneficiaries during the initial term, followed by a payment to charity at the end of that term. The focus of this article is the CLT.
CLTs are flexible enough to meet many charitable, financial, and non-financial goals for donors. For example, CLTs can:
• Reduce income, gift, estate, and/or generation-skipping transfer taxes
• Transfer money, stock, and/or illiquid assets to heirs
• Maximize charitable giving
• Avoid the adjusted gross income limitations on the deductibility of charitable gifts
• Obtain an income tax charitable deduction for gifts to foreign charities
• Plan the donor’s estate
• Preserve wealth for the family.
The CLT is an irrevocable trust designed to provide payments of income to a minimum of one non-profit charitable organizations for a period measured either by a fixed term or the life of an individual, after which the remaining trust assets are paid to the grantor of the trust or to one or more non-charitable beneficiaries named in the trust instrument. Frequently the non-charitable beneficiaries are family members of the donor. It is a separately invested trust created by transferring cash, marketable securities, or income-producing property to the CLT. There are no minimum or maximum payout requirements for the CLT.
With a grantor CLT, the donor is considered to be the owner of the CLT assets and all income and expenses of the trust pass through to the donor for reporting on the individual federal tax return. The donor can claim a charitable deduction at inception of funding for the present value of the charitable interest, subject to applicable percentage limitations depending on whether a public charity or a private foundation is the beneficiary. No additional or future income tax deduction is allowed. The primary objective of this type of CLT is the reduction of income taxes in the year of funding. A grantor lead trust must be established as an inter vivos trust.
With a non-grantor lead trust, the CLT is treated as a tax-paying entity separate from the donor and is subject to the same IRC Subchapter J tax rules as are complex trusts. Income and expenses are reported on a separate fiduciary income tax return and do not flow through to the donor. No individual income tax deduction is allowed the donor, however the trust is able to deduct its annual payments to the CLT as charitable deductions. With qualifying charitable entities being broader than Internal Revenue Code Section 170 entities, deductions are additionally permissible to foreign charities. As the remainder beneficiary is usually someone other than the donor, a transfer tax deduction is allowed for the charitable interest. As a result, the non-grantor CLT is commonly used to reduce or eliminate the transfer tax on a transfer to the donor’s heirs. A non-grantor lead trust may be inter vivos or testamentary.
By combining the various possible components of the CLT in different manners (for example, a testamentary non-grantor CLUT or an inter vivos grantor CLAT coupled with reversionary rights to the donor or to his or her heirs), the donor is able to tailor and design a trust having the desired outcomes. The trust can therefore best address the needs of the donor and his or her heirs and of the charity through the receipt of a multi-year pledge.
If you or someone you know is interested in establishing a charitable trust, please do not hesitate to contact the experienced estate planning attorneys at Chepenik Trushin LLP who are ready, willing, and able to take care of all of your estate planning needs.