Why Would You Need a Charitable Lead Trust?
A Charitable Lead Trust (CLT) is useful if you are charitably inclined, have appreciated assets (meaning they are worth a lot more than you paid for them), and would like an immediate income tax deduction. This allows a charitably minded client who has a large concentration of a single asset (or highly appreciating growth asset) to diversify without realizing income on the sale of the asset and then creating an income stream.
The appreciated assets are contributed to the Charitable Remainder Trust and, in exchange, the income beneficiary (selected by the creator of the CRT) would receive an income stream (either for life or a term of years). The creator of the trust, who is making the donation, receives an income tax deduction.
The Charitable Lead Trust is a split-interest trust, meaning there is an income interest (for a period of years) and a remainder interest. The charity is paid income during the term. After the term, the remainder goes to the designated individual beneficiaries.
There are sub-categories of the CLT. These include the following:
- Charitable Lead Annuity Trust (CLAT): The charity receives a stated amount of the initial assets each year. This amount is established at the beginning of the term and will not change regardless of investment performance. With this path, it is possible for the trust to run out of assets.
- Charitable Lead Unitrust (CLUT): The charity will receive a variable distribution depending on investment performance and the amount withdrawn. This device is rarely used.
Is it irrevocable or revocable?
The CLT is irrevocable, meaning once it is created, it cannot be changed.
Is a separate tax identification required?
The Charitable Lead Trust does require a separate Tax Identification Number. Since the CLT is tax-exempt, assets can be sold with the trust without realizing a gain.
Is a gift tax return required?
Since this is a donation, the contribution to the trust is not a gift to the charity. To the extent, there is a gift to a beneficiary, a gift tax return would be required.
Is there creditor protection?
To the extent assets are in your name, they are available to your creditors. Thus, the contribution to a CLT is not accessible to creditors but is also not accessible to you. If there is a distribution to you, then that distribution is subject to the claims of your creditors.
What assets can be placed in this type of Trust?
Generally, you would place highly appreciated assets in this type of trust. If you sell the property, you will generate capital gains.
If you contribute the property to the CLT, you do not generate any taxable gains yet receive the benefit of the charitable contribution.
Contact a Trust Attorney today to schedule a consultation and learn more about how we can help you with your estate planning needs.