Who Would Have Thought…
…that the Charitable Lead Trust’s time
would ever come?

Somewhere high above, far beyond what the naked eye can see, two or more planets must be in alignment.  That’s the only rationale for what’s happening in our world of economics and charitable giving. 

In a recent IRS report, the Charitable Lead Trusts (CLTs) showed themselves to be the fastest growing charitable trust in the last two years, far surpassing in percentage all of the charitable trusts created.  While there are still only 6,600 in force, the trend is definitely there.

Also interesting is that most have been for less than $1 million, with the average being around $300,000.

Essentially, CLTs can be used by wealthy and generous Americans as temporary charitable foundations to fund the programs of their favorite charities for extended periods, often beyond their own lifetimes, and then passing the funding assets to their heirs.

The CLT is the contrarian of what most people think when they consider charitable gift planning.  In most instances, charitably minded people can “give away the tree but keep the fruits.”

  • Charitable bequests = Donors have access to and are able to consume all the income and the principal; if anything is left, charities receive it.
  • Charitable gift annuity = Income for one or more persons and at death of annuitant(s) the income-supporting principal passes to charity.
  • Charitable remainder trusts = One or more beneficiaries receive income generated by the principal; at death the remaining principal (remainder interest) pass to one or more charities.

In all of the above instances, two interests have been identified:  the present or income interest and the future or remainder interest.  If these trusts are done properly, there are considerable financial advantages for the donor in income tax savings generated by the charitable deductions, avoidance of long-term capital gains tax and estate tax savings.

The Charitable Lead Trust
The charitable lead trust is the mirror image of those giving arrangements wherein the remainder interest passes to charity.  While it is also a split-interest gifting arrangement, as the name suggests, the charity receives the “lead” or income interest and the non-charitable beneficiaries receive the remaining interest.

The income interest is contributed to charity for a term of years or for the life or lives of one or more individuals.  The remainder interest will be returned to the donor or other non-charitable beneficiaries.

Current tax law provides that a charitable deduction is allowable only if the charitable lead interest is in the form of either a guaranteed annuity (fixed dollar amount distributed no less than annually) or as an unitrust amount (fixed percentage of the trust value determined each year and distributed at least annually).

The donor has the option of setting up a CLT (1) to either get an immediate income tax charitable deduction for the present value of the charity’s right to receive the income interest at the cost of later being taxed on the income as it is received by the trust, or (2) – to forego the income tax charitable deduction so that he will not be taxed on the income subsequently earned by the trust.

Why Now?
The reason CLTs were not particularly popular in the past is because donors considered the costs too high, the benefits too low and the process too complicated.  CLTs were seen as a planning technique advantageous only for the very, very wealthy.

However, times change.  So do economic circumstances.  We are having what might be called The Perfect Storm in economics and charitable giving.

    • The stock market, although recovering, is still going up and down like a yo-yo, influenced by what is happening either in some European country or in Washington.
    • Asset values are fluctuating widely, especially in home values, depressed by the number of houses in foreclosure.
  • Seniors have fared the best of all the income groups; their net worth has risen 42% in the last 25 years.
  • Interest rates are at historic lows as the Federal Reserve tries to stimulate the economy by making more dollars available for companies to invest in themselves.
  • The uncertainty of what’s going to happen if Congress lets the so-called “Bush Tax Cuts” expire and the estate tax exemption drops from $5 million to $1 million, the estate tax itself rises from its current 45%, and income tax and capital gains tax rise from their current levels.


Of the above, the last two points may have had the greatest impact on donors using CLTs.  Lower interest rates significantly impact the financial benefits of CLTs.

For example, a Charitable Lead Annuity Trust, paying 5.75% to charity for 20 years, yields a 100% estate tax deduction.  Assuming growth in value and payout as equal, on a gift of $300,000 grandparents could pass on to their children and grandchildren $300,000 and leave a legacy of $345,000 to their favorite charities.

Any increase in asset value would accrue to the heirs. If the stock market rises, as many believe it will eventually, these donors would be able to leave more to their heirs with this planning technique than they could without it.

Uncertainty as to what will happen to our tax structure, especially in the area of estate taxes, is prompting many seniors to seek the advice of their accountants to plan “what if…?”  “What would be the tax on my estate if I do nothing, Congress does nothing, and I die in 2013?”

Might there be a CLT in your future planning?
After all, they –

  • Can reduce and, in some cases, eliminate gift, estate and generation-skipping transfer tax on rapidly appreciating assets passing ultimately to family members;
  • Can generate an income tax charitable deduction;
  • Can reduce probate costs;
  • Can be created by donors during lifetime or by will.

The CLTs are not for everyone, but it can be the solution for some. 

Would you benefit from a major charitable gift?  The best way to find out is to do a quick analysis of your financial situation. Your accountant, trust officer, tax or financial advisor should be contacted, particularly with regard to significant or deferred gifts.

We hope the topic for this newsletter might just be the trigger for some of our donors to act and use this or some other planning technique to put their house in order.

Leaving a legacy is too important to leave to chance!!!

For more information, contact Parvati Hansen at the
Janaka Foundation office.