Charitable Trusts

A charitable lead trust, or CLT, is a type of trust that benefits one or more charities during the lifetime of a person. It is sort of like the mirror-image of a charitable remainder trust. When the beneficiary passes away, the assets that remain in the trust are given to one or more other people, typically the heirs of the original beneficiary. Alternatively, a charitable lead trust may be set up to last for a set term of years, during which the income generated is given to charity. Typically the maximum term is twenty years in the case of a set term of years.

This is best understood by example.

Bob provides well for his family, but has a passion for charitable giving, and in particular, for AIDS relief. He sets up a trust with some excess assets, instructing the trustee to provide income from the trust to various AIDS relief charities. The trustee invests the assets with an eye toward preserving them, while generating income. The income goes to Bob's selected charities.

When Bob passes away, the assets are given back to his family. In this way, Bob may ensure that his family is provided for when he is gone, while benefiting a charity during his lifetime. Further, he benefits from preferential IRS tax treatment for the assets during his lifetime.

CLTs are sometimes referred to as "Reverse Charitable Remainder Trusts," because their structure is in essence the opposite of a CRT. They resemble, in some ways, "lending" the assets to the charitable institution for a period of time during which the charity may draw income from them.

There are two main types of charitable lead trusts. The first is known as a "grantor" CLT. A grantor charitable lead trust provides an up-front federal tax deduction to the donor. There is a price for this benefit, however, as the grantor is taxed on the income generated by the trust and donated to charity. For this reason, grantor charitable lead trusts are not often used.

The second variety of CLT is called a "nongrantor" charitable lead trust. It has significant advantages, in that it not only greatly reduces the gift and estate tax on the transfer of highly appreciated assets to heirs, but it also provides a transfer free of capital gains taxes. Often the donor can serve as trustee and therefore control how the assets as invested and used. Further, the income that is generated from the trust and donated to charity is tax-free.

As with any other variety of trust, you would be well advised to consult a qualified attorney, financial planner, and tax advisor before choosing this structure, as the rules are complex.

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