by Jana Swenson
If you have a desire to give yearly to your favorite charity, instead of deferring that gift to sometime in the future, then a charitable lead trust (CLT) may be an option for you.
A CLT is a type of irrevocable trust that provides income to the charity now, for a specified period of years, with a remainder interest passing back to the donor, or to a family or other non-charitable beneficiary, at the termination of the trust. Generally, the gift to your heirs may be given with a reduced estate value that could lower your potential estate tax bill.
With a CLT, if the income in the trust is not sufficient to make the required annual payment to the charitable beneficiary, then principal must be distributed to make up the difference. There is no minimum or maximum payout percentage. The term of a charitable lead trust can be either for the life of an individual (or individuals), or for a term of years. The trust may also be structured with a combination of these, including both lives and a term of years. A CLT may either be created during the lifetime of the donor (intervivos) or at the donor’s death (a testamentary trust).
For income tax purposes, a contribution to an intervivos CLT is only eligible for an income tax deduction if the donor (grantor) is treated as the owner of the income interest, which results in all income being taxed to the donor as it is received by the trust. A gift or estate tax charitable deduction is generated (to offset the income generated) depending upon whether the gift to the trust is made during lifetime or at death.
This type of trust is used when the donor wants to provide benefit to the charity now but wants to retain some interest in the property either for the donor, the donor’s family, or some other non-charitable beneficiary. The donor can set the trust up to pay the remainder to his or her heirs with reduced gift or estate tax consequences, which allows the donor to maximize what is passed on to heirs while minimizing the tax associated with that transfer.
A CLT offers a great way to make annual gifts to charity and provide for your heirs, while potentially reducing your estate and gift tax burden. To learn more about CLTs and to determine whether they are appropriate for you, you should discuss your particular situation with your financial advisor, attorney, and tax professional.
Jana Swenson is a Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, and can be reached by calling the firm’s Murrieta, California office at (951) 461-7220 or toll-free at (866) 894-2461.