Charitable Lead Trusts (CLTs)
A Charitable Lead Trust is the inverse of a CRT. It distributes an annual income stream to a qualified charity
for a term of years or a lifetime, after which the remaining principal transfers to non-charitable beneficiaries
(such as children or grandchildren).
Types of CLTs:
- Charitable Lead Annuity Trust (CLATs): Pays a fixed annual dollar amount to charity.
- Charitable Lead Unitrust (CLUTs): Pays a variable annual amount based on a fixed
percentage of trust assets revalued annually.
Tax structures of CLTs:
- Grantor CLT: The grantor claims an immediate income tax deduction under IRC §170(f)(2)(B)
for the present value of the payments to charity, but must report and pay tax on the trust’s
annual income during the term.
- Non-Grantor CLT: The trust itself is a separate tax entity and claims a charitable deduction
under IRC §642(c) for payouts to charity. The grantor receives no income tax deduction but
successfully removes the assets and all future appreciation from their taxable estate.
CLT values and tax deductions are calculated using interest rates under IRC §7520. If the trust’s investment
returns exceed the IRC §7520 rate, the excess appreciation transfers to the heirs completely free of gift and
estate taxes.