Charitable Lead Trusts (CLT)
Charitable lead trusts ("CLTs") are irrevocable trusts into which a donor can transfer cash and other assets to a trustee. The trust provides an annuity - fixed in the case of a charitable lead annuity trust ("CLAT"), or variable in the case of a charitable lead unitrust ("CLUT") - to one or more qualified charities for a specified term. At the end of the term, what remains in the trust is paid to a noncharitable beneficiary, typically the taxpayer's children or a trust or trusts for their benefit.
CLTs can be created during life or at death. They are either qualified or nonqualified. A qualified CLT refers to a trust transfers to which are deductible for gift or estate tax purposes. A nonqualified CLT generally refers to a trust transfers to which are not deductible for gift or estate tax purposes.
CLTs are also either so-called "grantor" trusts or complex trusts. A grantor trust is a trust of which all the income is taxable to the grantor under §§ 671 - 679. It is a trust of which all of the trust's income, deductions, and credits will be taken into account by the grantor when he or she files his or her individual income tax returns. When a qualified CLT is a grantor trust, the grantor receives an immediate income and gift tax deduction for the present value of the annuity stream payable to the charities.
If the CLT is not designed as a grantor trust, then it is subject to the rules of subchapter J relating to complex trusts. If a qualified CLT is not a grantor trust, than the grantor does not receive an income tax deduction (but the grantor also does not have to report the income from the trust each year).
To reiterate, there are three types of CLTs that may be established: (i) grantor CLTs; (ii) nongrantor qualified CLTs; and (iii) nonqualifed nongrantor CLTs.
A qualified CLT creating during the life of the grantor provides a source of funding for future charitable gifts and an income tax deduction in the year the trust is created (assuming the trust is a grantor trust). Such a trust is typically structured so that the present value of the payments to the charities will equal the initial fair market value of the property transferred to the trust. This enables the grantor to receive a gift tax charitable deduction for the value of the assets contributed to the CLT. In other words, the value of the assets transferred to the CLT is not subject to gift tax. At the end of the lead term, the remaining trust property passes to the trust's remainder beneficiaries free of gift tax. If the property transferred to a CLT produces a rate of return above the § 7520 rate in effect at the time of the CLT's creation, there will be property in the trust to pass to the trust's remainder beneficiaries. The greater the rate of return in relation to the § 7520 rate, the more property will be left. All of this value will pass to the trust's remainder beneficiaries free of gift tax.
A CLT created upon the death of a decedent is typically structured so that the present value of the payments to the charities will equal the initial fair market value of the property transferred to the trust. This will enable the decedent's estate to receive an estate tax charitable deduction for the value of the assets contributed to the CLT. In other words, the value of the assets transferred to the CLT is not subject to estate tax. At the end of the lead term, the remaining trust property passes to the trust's remainder beneficiaries free of estate and gift tax. If the property transferred to the CLT produces a rate of return above the § 7520 rate in effect at the time of the CLT's creation, there will be property in the trust to pass to the trust's remainder beneficiaries. The greater the rate of return in relation to the § 7520 rate, the more property will be left. All of this value will pass to the trust's remainder beneficiaries free of estate and gift tax.
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