CHARITABLE LEAD TRUSTS
Charitable gift annuities and charitable remainder trusts are life income gifts. Both of those gift vehicles provide an income stream for the donor (or other designated person) with the remainder going to the charitable organization. A charitable lead trust, on the other hand, provides an income stream to the charity with the remainder going back to the donor or to another person[s]. In addition to accomplishing a philanthropic intent, a charitable lead trust is often used to accelerate an income tax charitable deduction for a future charitable gift into a current tax year or to pass property to heirs at reduced transfer tax costs. A charitable lead trust (CLT) operates according to the terms of its trust instrument. It is usually managed by a professional trustee who is selected by the donor. The donor can act as trustee if he/she does not retain the power to choose the charitable beneficiaries from year to year. The trust term is measured by either a specified term of years or the life of a living person (donor, donor’s spouse, or a lineal ancestor or the spouse of a lineal ancestor of all of the remainder beneficiaries). The donor of a CLT transfers property to the trust and provides for annual payments to one or more charitable organizations. If at any time the actual income is not sufficient to make an annual payment, the trustee will invade principal to complete the pay-out. The income payment to the charitable organization will either be in the form of an annuity interest (fixed annual payment) or a unitrust interest (fixed % of the market value as determined at least annually). A CLT is characterized as either qualified or nonqualified (under IRS guidelines) and as grantor or nongrantor (under the grantor trust rules of the IRS Code). A qualified trust entitles the donor to both a gift and estate tax charitable deduction for the charity’s income interest and an income tax deduction for the charity’s interest, if the donor is also the owner (taxed on the income). In order to be a qualified trust, the trust’s payments must conform to certain measurable standards (so that IRS tables may be used to determine a dollar value). A nonqualified lead trust is very uncommon. With a grantor trust, the donor must be considered the owner of the trust under the IRS guidelines known as the grantor trust rules. The donor cannot claim a current charitable income tax deduction for establishing the trust unless he/she is the owner of the trust and is taxed on the income. The main reason for establishing a qualified grantor trust is to accelerate to the current year a deduction for future charitable gifts. If the donor is not considered to be the owner of the lead trust (nongrantor trust), the donor is not taxed on the income in the trust and is not entitled to a charitable income tax Charitable Lead Trust 1
deduction when establishing the trust. The main purpose for creating a qualified nongrantor trust is not to get an income tax deduction, but rather to use the gift or estate tax deduction to reduce the cost of passing assets to heirs. At the end of the charitable lead trust term, the remaining principal in the trust reverts back to the donor or is distributed to beneficiaries designated by the donor.
11/11/2005
Charitable Lead Trust
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