CLTs: A non-profit basis that takes the lead | Adler Pollock & Sheehan PC

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  CLTs: A non-profit foundation that takes the lead |  Adler Pollock & Sheehan PC

Are you inclined to help a charity for a period of time without ultimately giving up the property? Consider the benefits of a not-for-profit lead trust (CLT). This type of trust is essentially the opposite of the Charitable Rest Trust (CRT), which is a better known alternative (see “Is a CRT a Better Option?” Below). With a CLT, ownership reverts to family members – not the charity.

At the same time, the CLT provides the charity with a stream of annual revenue for a period of years. So everyone wins.

How it works

A CLT can be funded during your lifetime or a will trust can be created through your will or other estate planning documents. In any case, the trust is irrevocable. You can incorporate this technique into your estate plan to accommodate charitable intentions.

The basic requirement is relatively simple, although the mechanics can be complicated. Typically, you will bring property into the trust fund that will last for a number of years. The charitable organization (or charity group) known as the Income Beneficiary will receive payouts during the trust period. Depending on the structure of the CLT, payments are made as a fixed annuity payment or as a percentage of the trust. After the trust period has expired, the remaining assets are distributed to the named beneficiaries – usually your children or grandchildren.

Traditionally, ownership transferred can include assets such as publicly traded stocks, real estate, business interests, and even stocks of private companies. In some cases, property can be sold to generate the desired income. Reservation: Depending on the structure of the CLT, a sale can lead to an immediately taxable capital gain.

Effects on Charitable Withdrawal

One of the main advantages of a CRT is that you can claim a current tax deduction on the value of the remaining interest. However, if you use a CLT, your deduction may or may not be limited depending on whether it is a grantor or a non-grantor trust.

With a grantor CLT, subject to other applicable deduction limits, you can claim a current deduction for the present value of future payments to the charitable beneficiary. However, this regulation has a downside: The investment income generated by the trust is taxable with the donor during the term.

Conversely, if the CLT is set up as a non-grantor trust, the trust itself – not the grantor – is treated as the owner of the property. Consequently, the trust is liable for any tax due on the undistributed income. Thus, the trust, but not the grantor, can claim the donation deduction for distributions to the organization.

Each situation is different, but the resulting income tax liability for a grantor trust often outweighs the benefits of the current tax deduction. In addition, any charitable deduction for property contributions is limited to 30% of adjusted gross income. For these reasons, you may prefer to set up the trust relationship without an guarantor.

Note that a properly structured CLT allows for a gift or inheritance tax deduction on the value of that portion of the trust that goes to charity. This makes it possible to transfer residual interest to family members at relatively low tax costs.

Ins and outs

The CLT must make annual payments to at least one named charity for a specified number of years, the life of one or more people, or a combination of the two. In contrast to CRTs, there is no mandatory time frame of 20 years, nor does the trust have to impose maximum or minimum requirements every year.

After the trust period has finally expired, the remainder will be transferred to the beneficiaries named at the beginning. Accordingly, the assets ultimately end up in the hands of those who want you most.

Is a CLT Right for You? It depends on your circumstances. Discuss this possibility with your estate advisor.

SIDEBAR: Is a CRT a Better Option?

Consider whether a Charitable Rest Trust (CRT), a close cousin of the Charitable Lead Trust (CLT), is a preferred option for your situation. With a CRT, the trust typically pays income to the designated beneficiary (s) – for example, the trust creator or spouse – for life or for a period of 20 years or less. If it suits your needs, you can postpone receiving income distributions to a later date. Meanwhile, the assets in the CRT continue to increase.

When you transfer assets to the CRT, you are entitled to a current tax deduction based on several factors including the value of the assets at the time of transfer, the age of the income beneficiaries, and the federal rate under Section 7520. Keep in mind when structuring a CRT that the higher the payout, the lower the deduction.

There are two types of CRTs: the charitable restannuity trust and the charitable restunitrust. With both options, the person entitled to work must be entitled to annual payments during their lifetime or for a maximum of 20 years. In addition, other tax law requirements apply.

After all, like a CLT, a CRT is irrevocable. In other words, once it’s done there is no going back and you cannot make any other changes. So you need to be fully committed to this approach.