Charitable Lead Trusts—Are They Right for Your Legacy Plan?

Charitable trusts can be a powerful planning tool for merging your philanthropic purpose with your family wealth transfer goals

  • Wealth Planning

Charitable Lead Trusts—Are They Right for Your Legacy Plan?

Creating an enduring legacy involves implementing a variety of techniques that meet the goals of your estate plan. Trusts are an important lever in most plans, and charitable trusts can be a powerful planning tool for merging your philanthropic purpose with your family wealth transfer goals. That’s because they can be structured to provide income streams to beneficiaries and also create certain tax benefits for donors.

Take for example a Charitable Lead Trust (CLT). With CLTs, a donor establishes an irrevocable trust that makes payments to one’s favorite charitable entity for a defined period of time. When that charitable distribution period ends, the trust’s remaining assets are distributed to the donor’s non-charitable beneficiaries, typically their family members.

Types of Charitable Lead Trusts

For income-tax purposes, a CLT can be structured as a grantor trust or non-grantor trust.

In a grantor CLT, all trust income and expenses pass through to the donor, who may take an upfront charitable income tax deduction on one’s personal return and is then responsible for income taxes on future trust income.

Donors to a non-grantor CLT cannot take a charitable income tax deduction for their contribution to the CLT, but they also are not responsible for paying the income tax on the trust’s income. Instead, the trust is the entity that is responsible for the taxes, but the trust may take charitable income tax deductions for the distributions made to charity as a result.

A grantor CLT must be inter vivos, or created during the donor’s lifetime. A CLT that funds at the donor’s death is referred to as a testamentary CLT. If a testamentary CLT is created, the full fair market value of the CLT is included in the donor’s estate. However, the estate can deduct the net present value of the income stream granted to the charity for estate tax purposes.

With a Charitable Lead Annuity Trust (CLAT), the amount of the annual payments to the charity is fixed at the start of the trust term. This contrasts with a Charitable Lead Unitrust (CLUT), which calculates the payments to the charity annually based on a fixed percentage of the trust’s value.

Charitable Lead Trust Advantages and Considerations

As with any estate planning strategy, CLTs have a set of pros and cons, depending on your objectives. Some key advantages of CLTs are their potential to:

  • Lower gift, estate, and generation-skipping transfer tax liabilities
  • Fulfill donors’ philanthropic interests while keeping trust assets within the family
  • Defer the non-charitable beneficiary’s receipt of trust assets

Some CLT requirements that could be potentially disadvantageous are:

  • The charitable payment must be made each year, regardless of whether the trust has generated sufficient income to fully fund the payment
  • The trust terms are irrevocable—they cannot be altered after assets have been transferred into the CLT
  • The remainder beneficiary must wait until the trust term has expired to receive any remaining trust assets

Consult with your financial and tax advisors to explore all the factors of these strategies and to determine what other options might be optimal for your estate plan.

At Rockefeller, we understand the importance of selecting the right vessel for your philanthropic efforts, ensuring your intentions are realized efficiently and effectively. We help our clients think not only about their needs of today, but also about their passions, the lives they wish to lead in the future, and the legacies they want for their families.

Explore our Philanthropic Advisory and the storied history of The Rockefeller Trust Companies in serving generations of families. Our seasoned team of experts can help you build a bespoke plan with legal and financial structures for maximum impact.


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