Fundamentals - Charitable Lead Trust

Charity Advisor Resource Newsletter - Volume 1.1 (2009)

BY JONATHAN D. ACKERMAN

Character - A CLT is created by an irrevocable written instrument containing specific provisions in order to obtain income, gift and/or estate tax benefits. A CLT can be created during life (inter vivos) or at death (testamentary). A CLT pays the lead interest to charity for a period of years or the life of an individual with the remainder either reverting back to the donor or to or for the benefit of another private individual. Thus, as it relates to the payout, a CLT can be viewed as the opposite of a charitable remainder trust. A CLT also differs from a CRT in several other significant respects, such as a CLT is not a tax-exempt entity.

Types -

Non-Grantor: In a non-grantor CLT, the donor is not subject to income tax on the income and gain incurred by the CLT. Correspondingly, the donor is not entitled to an income tax charitable deduction in the year the CLT is created. The trust is a taxpaying entity, but the trust itself should receive a charitable income tax deduction for the lead payments to charity. The present value of the remainder interest in the CLT is treated as a gift for gift tax purposes.

Grantor: In a grantor CLT, the donor is subject to income tax on all income and gain incurred by the CLT. Correspondingly, the donor is entitled to a charitable income tax deduction in the year the CLT is created. The present value of the lead charitable interest is the amount the donor will be entitled to deduct as a charitable income tax deduction. This deduction, however, will have to be recaptured for income tax purposes on a pro rata basis if the donor dies during the term of a term-of-years CLT. In this case, the trust is a tax nothing and does not receive a charitable income tax deduction for the lead payments to charity.

Super-Grantor: The super-grantor CLT is a hybrid and special creature. It is essentially a defective grantor trust for income and estate and gift tax purposes. In other words, the donor is subject to all of the income and gain incurred by the trust (a grantor trust for income tax purposes), but the CLT assets are not includable in the gross estate of the donor. Thus, the donor can implement income and estate tax planning into his or her philanthropic planning.

CLAT v CLUT - A charitable lead annuity trust (CLAT) pays out an annuity amount to the charitable lead beneficiary. Thus, a specific dollar amount or a percentage of the net fair market value of the assets contributed to the CLT determined on the date of contribution may represent the amount paid out to the charity. The annuity amount will be fixed on the date of creation and cannot change. A charitable lead unitrust (CLUT), on the other hand, pays out a unitrust amount to the charitable lead beneficiary. Thus, a percentage of the net fair market value of the assets contributed to the CLAT determined on the date of contribution and revalued each year will represent the amount paid out to the charity. The unitrust amount is similar to the unitrust payout from a standard charitable remainder unitrust. The net income only payout (available to a net income only charitable remainder unitrust, for instance) is not available to CLTs.

Sample CLT Forms - The IRS recently published sample forms for grantor and non-grantor inter vivos and testamentary charitable lead trusts, See Revenue Procedure 2007-45 and Revenue Procedure 2007-46 (for a testamentary CLAT). Each Revenue Procedure contains significant annotations and alternate provisions for a CLT.