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Charitable and Tax Planning with Charitable Lead Trusts

A Charitable Lead Trust (“CLT”) is tax beneficial way to achieve a donor’s philanthropic goals and pass assets to heirs at a reduced transfer tax rate. A CLT is a powerful tool for donors who anticipate high estate and gift taxes.

Conceptually, when the trust is created, the donor designates a charitable beneficiary(ies). The donor funds the trust with assets that are invested and managed by a trustee. The invested assets are then used to pay an income stream to the designated charity. The income interest will be paid as a fixed amount (a Charitable Lead Annuity Trust) or paid as a fixed percentage of the trust’s assets revalued annually (a Charitable Lead Unitrust).

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At the end of the annuity period, the remaining trust assets revert to the donor or are transferred outright, or in trust, to one or more non-charitable beneficiaries (usually the donor’s heirs) designated by the donor.

The creation of the CLT results in two separate gifts (the split interest): (1) a gift of a current interest to one or more charitable beneficiaries; and (2) a gift of the remainder interest to one or more non-charitable beneficiaries.

Tax Consequences of CLTs

The CLT can be further classified according to how it is taxed for income and transfer tax purposes. The type of CLT determines which party reports the CLT’s items of income, deduction, and credit.

Grantor CLT

In a grantor CLT, the donor is treated as the owner of the trust by operation of the grantor trust rules. In a grantor CLT, generally, the donor:

  • Can claim an income tax charitable deduction at inception for the present value of the charitable interest;
  • must include all items of income from the trust in his or her personal income tax return; and
  • received no additional income tax deduction as the grantor CLT makes payments to the charitable income beneficiary,

In a grantor CLT, the donor receives an immediate tax benefit while the charity receives an annual contribution. The donor’s initial tax benefit is offset in part by the inclusion of annual trust income on the donor’s personal tax return. 

Non-Grantor CLT.

In the non-grantor CLT, the CLT is treated as a taxpayer, separate and apart from the donor. In a non-grantor CLT, the trust:

  • is taxed as a complex trust;
  • items of income are taken into account by the trust as earned each year;
  • receives a charitable income tax deduction for items of gross income that are paid to a qualified charity during the taxable year (the donor is not permitted an income tax deduction).
  • if the remainder beneficiary is someone other than the donor, a transfer tax deduction is allowed for the charitable interest.

As a result, the main objective in using a non-grantor CLT is to benefit charity and remove assets from an estate, passing those assets on to family members at end of the trust term with little or no gift or estate tax liability.

Charitable lead trusts are very detailed and technical and involve additional variables not discussed. Structuring them appropriately depends largely on the donor’s charitable intent, estate plan, desired tax result and the charitable organization. If you would like to learn more about charitable trust, or charitable gift planning in general, please call our office.


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Client: What assets are considered part of your net worth when applying for the Veterans Benefits?

Attorney: Net Worth means the net value of the assets of the veteran and his or her dependents. It includes such assets as bank accounts, stocks, bonds, mutual funds and any property other than the veteran’s residence and a reasonable lot area.

There is no set limit on how much net worth a veteran and his dependents can have, but net worth cannot be excessive. The decision as to whether a claimant’s net worth is excessive depends on the facts of each individual case. All net worth should be reported, and the VA will determine if a claimant’s assets are sufficiently large that the claimant could live off these assets for a reasonable period of time. VA’s needs-based programs are not intended to protect substantial assets or build up an estate for the benefit of heirs.


ASK SASSY

Hook Law Center: Sassy, Is it true that stuffed animals and even robotic pets can help dementia patients?

Sassy: Yes, I have heard of this! Patients who suffer from Dementia and Alzheimer’s disease are also likely to suffer from anxiety and depression. I know that when I am being pet, my dad seems to ease and shrug off the stress that he is carrying. This seems to work for patients with dementia and Alzheimer’s as well, and even more interesting, a lot of these pets are not actually living, they are stuffed or mechanical. Actually, Hospice of the Valley wrote an article where they discussed the differences their staff and resident family members saw when they began to incorporate these furry companions, it is worth the read!

Read the article here

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