A charitable lead trust is "an irrevocable agreement in which a donor transfers assets to a trust that creates an income, or lead, interest for a charity," according to the Renaissance CLT Handbook. Charitable lead trusts make payments annually for a pre-determined number of years to one or more charitable beneficiaries; this is the lead interest. Once participants reach the annuity period, the remaining funds or remainder interest return to the donor or pass on to other non-charitable beneficiaries.
The donor party of a charitable lead trust is an individual, corporation, limited-liability company, partnership or other entity. Individual donors may create the trust during their lifetime or set it up to begin after death. Banks, charities or individuals may serve as the trustee in a charitable lead trust. A trustee is the party who agrees to hold funds before they reach the beneficiaries. Charitable-income beneficiaries may be publicly or privately controlled charities, donor-advised funds or private foundations, and the grantor, or donor, may choose to divide the funds between multiple beneficiaries. Of the non-charitable beneficiaries, one must be an individual, corporation, LLC or other entity.
Grantor Charitable Lead Trust
The grantor charitable lead trust model requires that the donor act as the owner of the trust. This allows the donor to claim an income-tax charitable deduction as soon as he creates the trust. However, he must include all elements, such as deductions, credits and income belonging to the trust when calculating his personal income-tax return. Consequently, the grantor cannot claim any additional income-tax deductions since the grantor trust is paying installments to the charitable assignee. Typically, in grantor trusts the remainder beneficiary is the donor or the donor's spouse. Remember that with all charitable lead trusts it is possible to exhaust all funds, leaving the remainder and beneficiaries nothing.
Non-Grantor Charitable Lead Trust
When engaged in a non-grantor charitable lead trust, the trust accounts for income, deductions and credits annually. Using this method, the donor cannot take an income-tax deduction, but the trust may utilize the unlimited charitable income-tax deductions. In non-grantor trusts, a transfer-tax deduction is possible if the donor himself is not the remainder beneficiary. In non-grantor charitable lead trusts the non-charitable beneficiary is normally the donor's spouse or heirs; when donors seek to avoid having heirs pay a transfer tax, they choose the non-grantor format. According to the Renaissance CLT Handbook, "non-grantor and 'Super' CLTs are typically designed to remove all or a portion of the trust assets from the donor's taxable estate."
Super Charitable Lead Trust
A less common form of the charitable lead trust is the super charitable lead trust. This model utilizes positive aspects from both the grantor and non-grantor trusts. With a super charitable lead trust, donors include items of income, deduction and credit in their personal income and may receive income-tax deductions. Additionally, transfer-tax deductions may be possible as the beneficiaries are commonly the donor's heirs. One advantage of super charitable lead trusts and non-grantor trusts is the option to name a charity as its remainder beneficiary as the backup recipient in the event that all other named beneficiaries die before the annuity term ends.
"These trusts must comply with strict federal tax laws in order to receive favorable tax treatment," according to the Living Trust Network. For income-tax deductions, the Internal Revenue Code confines the amount of charitable deductions for a C corporation or individual to no more than 30 percent of their annual gross income. Anyone interested in creating a charitable lead trust should consult a financial adviser.
- IRS.gov; Charitable Lead Trust; July 2003
- Living Trust Network; Types of Trust; Charitable Lead Trusts; June 2011
- IRS.gov; Abusive Trust Tax Evasion Schemes-Special Types of Trusts; Charitable Lead Trusts; January 2011
- CharitableTrust.com; Renaissance CLT Handbook; Gregory W. Baker and Ted R. Batson Jr.
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