What is a charitable lead trust?
by Gerald Tahajian, CPA
A charitable lead trust (CLT) is an irrevocable trust established during your life or at your death that pays an annuity (lead interest) for a certain number of years to a chosen charity, depending on the wishes of the donor. Jacqueline Kennedy Onassis reportedly saved $100 million from being taxed because she used a CLT. In her case, she had her assets transferred to her private foundation. The foundation was required to pay at least 8 percent per year of the total asset value of the trust to a variety of legitimate charities for about 25 years, and then the remaining assets will revert to her children and grandchildren, with no tax consequences to them.
If you set up a CLT during your lifetime, the present value of the remainder interest is the current taxable gift. That is calculated by using the applicable U.S. Treasury regulations. The lower the interest rate, the lower the taxable gift and the more beneficial it is for the remainder beneficiaries because there is a greater chance the trust will grow at a rate in excess of the required payout to the charities.
The longer the term of the CLT, and the greater the percent paid to the charity annually, the greater the tax deduction will be for the beneficiaries. For example, a 20-year term CLT with an annual payout to the charity of 7 percent will result in about 15 percent of the total trust value being considered a gift to the beneficiaries. That means about 85 percent of the total value of the trust will eventually pass to the beneficiaries tax-free.
Generally, the same rules apply for a CLT established at death, except that if highly appreciated assets are going to be transferred to the trust, they will get a new income tax cost basis that is equivalent to the asset's fair market value at the time of death. That normally results in a lower capital gains tax when the securities are sold.
There are many other matters to consider before establishing a CLT. But it can be a powerful tool to minimize death taxes and pass a considerable amount of money to future generations if the beneficiaries can wait about 20 years before receiving the remainder interest. Your estate taxes can be virtually eliminated if you desire by using this technique while helping your favorite charities at the same time.
Jerry Tahajian is a CPA and attorney who practices law specializing in estate planning, wills, trusts and probate in Fresno. He is a graduate of Fresno State University and the University of San Francisco School of Law. His website is located at www.gltlaw.com -- e-mail him at jerry@gltlaw.com.
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