Charitable Lead Trust:

Questions Donors Ask

Will I be able to claim an income-tax deduction when I set up my CLT?

Maybe. If the trust is structured a certain way, the donor will be eligible to claim an income-tax deduction in the year they set up their trust. However, that means that all the trust income in following years will be taxed to the donor as well (subject to deductions for payments made to your organization). Most donors structure their CLTs in a way that does not yield a current income-tax deduction so that they don’t have to worry about income tax issues in the future. In both cases, the donor can provide wonderful support to your organization and pass trust appreciation to their family free of gift and estate tax. Be prepared to provide donors and their advisors with information that will help them decide which type of CLT is best.

Can I name my grandchildren as beneficiaries of my CLT?

Yes, you may list your grandchildren as beneficiaries. However, due to the generation-skipping transfer tax, there are more complications related to a lead trust with grandchildren as beneficiaries than one that passes assets directly to children. Most legal professionals would prefer the use of a charitable lead unitrust if grandchildren are named as beneficiaries.

How long will my CLT last?

There is no minimum or maximum term for a CLT. However, if you want to maximize the benefit to your organization and minimize transfer taxes, your organization’s gift officers and your donors’ advisors can help you determine the optimum term to accomplish these goals. Generally, the longer the term, the lower the taxable gift to the donor’s remainder beneficiaries and the higher the benefit to your organization.

What assets should I use to fund a CLT?

The most beneficial funding assets, for tax-planning purposes, are cash and rapidly appreciating assets (such as business interests) because the appreciation in a CLT will pass free of gift and estate tax to the donor’s heirs. Real estate is not an ideal asset to give to a CLT, because the trust is required to make annual distributions of trust assets to your organization, and nonprofits cannot accept partial interests or joint ownership in real estate. Because a CLT is a taxable trust, it is usually not ideal to contribute highly appreciated assets. Should the CLT need to sell them to diversify its portfolio, capital gains tax will be due from the trust, reducing what can eventually be passed to heirs.

When will I typically want to establish a CLT?

A CLT is an excellent planning option for donors when they want to provide funding to your organization now and maximize the inheritance of children or grandchildren later. When a well-formulated CLT terminates, the heirs receive the assets at substantially reduced gift- and estate-tax rates and can use the assets for a wide range of purposes. Charitable Lead Annuity Trusts (CLATs) are frequently used as part of the exit strategy prior to the sale of a closely held business or for succession planning of a family business.