Charitable Lead Trusts:
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, attorney, and tax advisor.
Article Provided by Toby
Mitchell, a Director/Investments with Stifel, Nicolaus & Company,
Incorporates, Member SIPC and New York Stock Exchange, who can be
contacted in the New York 3 Bryant Park office at (212) 328-2837.
