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Charitable Lead Trusts (CLT) and What to Consider
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What is a Charitable Lead Trust?

A charitable lead trust (CLT) is an irrevocable trust funded with a gift, including cash and other assets. Initially, the named charity receives income from the trust assets. After the specified term elapses, the remaining assets are distributed to the beneficiary free of taxes. If you want to know about charitable trusts pros and cons, learn now.

How a charitable lead trust works

The grantor is the individual that establishes the trust. He/she contributes or funds the trust set up to operate within a specified number of years. The charity is the appointed philanthropic organization named in the trust. The “lead” means the interest (from the trust’s assets) payable to the charity for the specified term. 

At the end of the specified term, all other assets and earnings that remain in the trust get distributed to beneficiaries – family members. The setting up and management of a charitable trust is undoubtedly more complicated than this explanation. State and federal laws and IRS rules apply. Hess-Verdon trust attorneys can assist in setting up a charitable lead trusts in California.

Funding the Trust

There are different types of CLTs, as we will see later. Based on the CLT structure you choose, you may be allowed to make tax deductions for all your cash contributions to the trust. The deduction calculations consider the term of the trust, IRS interest rates for trusts, and the estimated lead payments (payments to the charity). You may also fund the trust with real estate or stock assets, whichever grants you the most significant tax advantages. 

Payments to charity

It falls on the trustee to make regular payments to the defined charitable organization. These payments are made for the predetermined number of years or an individual’s lifespan named in the trust. CLUT trusts usually have a time limit that far exceeds 20 years.  Please speak with a Hess-Verdon attorney, however, as laws do change. 

Distributions to beneficiary

Following the end of the set term, the rest of the assets are evaluated and distributed to the designated family beneficiaries. The trustees will have a mandate to make distributions to reduce or eliminate transfer taxes and align with the trust deed. 

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Charitable Lead Trust Considerations

Charitable Lead Annuity Trust: If the CLT is set as a CLAT, the charity will get a specified amount of money from the trust each year. The lead remains constant no matter how well or poorly the trust investments do.

Charitable Lead Unitrust: If the CLT is structured as a CLUT, the annual payments to the charity are a specified percentage of the assets in the trust assets. The amount of payment will vary based on the performance of these assets. 

Grantor charitable lead trust: These types of CLTs allow the grantor to make tax deductions for the amounts paid to the named charitable beneficiary. Beware that this benefit may mean that the grantor bears taxation on all the trust’s income for its entire term. 

Non-grantor charitable lead trust: Here, the trust is considered the owner of the trust’s assets. The grantor is not eligible for tax deductions for amounts contributed to the trust, but neither is he/she held liable for paying taxes on the trust’s earnings. The trust pays its income taxes, and it can also claim deductions from the payments made to the charity. 

These charitable lead trust types have different implications on the final amount that reaches the non-charitable beneficiaries and the amount of transfer taxes (or non-thereof) during distributions. Work with an experienced trust lawyer to make informed decisions during CLT setup and administration. 

Charitable lead trust example

Suppose you put $14 million in a charitable lead trust. The named charity continually receives an income stream from the trust during its term. After that period elapses, the remaining assets are transferred to your loved ones free of estate and gift taxes. The trust accomplishes three things in one. 

It helps you: 

· Donate to a cause you believe in 

· Bequeath more assets to loved ones/ avoid probate 

· Eliminate gift and estate transfer taxes even for assets that have grown more than the 7520 Rate 

For more information and assistance with charitable lead trust, contact Hess-Verdon trust attorneys. Call (949) 706-7300.

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