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How Do Charitable Lead Trusts Work?

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  1. A charitable lead trust (“CLT”) is an example of a “split interest” trust. It has two sets of beneficiaries; the “income” (or “lead”) beneficiary, that is a charity, and the “remainder” beneficiary that is not a charity.  The CLT states that a specified payment be made to the charitable income beneficiary for a set number of years, with the remainder passing to non-charitable beneficiaries (e.g., the children of the CLT’s settlor).  The value of the gift to the non-charitable remainder beneficiaries is reduced by the actuarial value of the interest passing to the charitable income beneficiary.
  2. CLTs can be structured as a “grantor trust” (i.e., a trust whose items of income, deduction and credit appear on the grantor’s – the settlor’s – income tax return) or as a non-grantor trust (i.e., a trust that pays its own income taxes). Only a gift to a grantor CLT allows the settlor an immediate income tax deduction, equal to the actuarial value (using the IRS 7520 rate) of the lead interest that charity will receive.  (However, when the gift is to a grantor CLT, as the CLT recognizes income, the settlor picks up that income over time.)  When the charitable lead beneficiary is a public charity, if cash is contributed the deduction is available up to 60% of the settlor’s adjusted gross income (“AGI”) for the year; if the charitable lead beneficiary is a private foundation, the deduction is limited to 30% of the settlor’s AGI.  If a capital asset is contributed, when the lead beneficiary is a pubic charity the deduction is up to 30% of the settlor’s AGI; if the lead beneficiary is a private foundation, the deduction is up to 20% of the settlor’s AGI.

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