Charitable Lead Trusts (CLTs)

A Charitable Lead Trust runs a CRT backwards: charity is paid first, for a term of years or a lifetime, and whatever is left at the end goes to your children or grandchildren. Reach for one when you already intend to give annually, the IRC §7520 rate is low, and you want the remainder to land with your heirs, not a charity. If you want a deduction and nothing else, a donor-advised fund (section “Use Donor Advised Funds (DAF)”) does the job without the trust.

Two payout shapes. A Charitable Lead Annuity Trust (CLAT) pays charity a fixed dollar amount each year; a Charitable Lead Unitrust (CLUT) pays a fixed percentage of assets revalued annually. Choose the CLAT for wealth transfer, and it is not close—because the annuity is fixed, every dollar the assets earn above the hurdle rate belongs to your remaindermen. The unitrust’s payout rises with the portfolio, so charity captures much of the upside you were trying to move.

Then decide who eats the income tax during the term:

Grantor CLT

You take the whole charitable deduction up front, in the year you fund it, for the present value of the charitable payments ( IRC §170(f)(2)(B))—then pay income tax personally on everything the trust earns for the entire term, with no further deduction. This is a deduction-acceleration play: use it in a single spike year, the sale of a company or a large option exercise, when one enormous deduction now is worth more than many small ones later. Note the sting in the tail—if grantor trust status ends before the term does, part of that deduction is recaptured as income.

Non-Grantor CLT

The trust is its own taxpayer and deducts what it pays charity under IRC §642(c)—without the percentage-of-income limits that cap your personal deduction. You get no deduction at all. In exchange, the assets and every dollar of future appreciation leave your taxable estate. This is the wealth-transfer version, and it is the one most families should want.

The engine is arbitrage against the IRC §7520 rate. The value of the charity’s interest is calculated using that rate, so if the assets earn more, the excess passes to your heirs free of gift and estate tax. To zero out the gift, the annuity $A$ is set so its present value at the IRC §7520 rate $r$ exactly equals what you contributed—that is, $P=A\cdot a_{\overline{n}|r}$, so

where $a_{\overline{n}|r}$ is the ordinary annuity factor and $R_n$ is what remains for your heirs after $n$ years at growth rate $g$. Fund a zeroed-out CLAT with $5 million when the IRC §7520 rate is 4% and run it for 20 years:

Charity collects $20\times \$367,911\approx \$7.4$ million in nominal dollars, and if the portfolio compounds at 8% your children still receive

having used none of your lifetime exemption. Everything here is a bet on the spread between $g$ and $r$, and the bet is leveraged: because the annuity $A$ is fixed, every point of growth above the hurdle drops straight to the remainder. At 6% growth the remainder collapses to $2.5 million; at 10% it balloons to $12.6 million. Low rates and high-growth assets make the structure sing, while a CLT funded when rates are high is mostly an expensive way to give money away. One caution before pairing this with multi-generational planning—a CLAT’s GST inclusion ratio is not fixed until the charitable term ends, so if the remainder is headed for grandchildren, use the unitrust form (section “Dynasty Trusts”).