Charitable Lead Trust

What Is a Charitable
Lead Trust?

A charitable lead trust is an irrevocable agreement in which a donor transfers assets to a trust that creates an income or “lead” interest for a qualified charitable organization(s). Payments are made to the charitable beneficiary(ies) for a term of years or for the lifetime of one or more individuals.

The charitable lead interest can be designated to public charities, donor-advised funds, and private foundations. At the end of the trust term, the remainder of the trust’s assets are transferred either to the donor or to another individual — typically the donor’s heirs.

Benefits of a Charitable Lead Trust

Establishing a grantor charitable lead trust provides the grantor an immediate income tax deduction that offsets taxable income from a significant income event.
A charitable lead trust provides the grantor a federal gift tax charitable deduction. The assets in a non-grantor charitable lead trust are removed from the estate of the grantor for federal estate tax purposes. Non-grantor charitable lead trusts provide an excellent method for passing assets to heirs at a reduced transfer tax cost while making a significant gift to charity.
Unlike a charitable remainder trust, the charities receive an income stream throughout the trust term, allowing donors to see their charitable impact during their lifetime.

Who Is a Charitable Lead Trust For?

A charitable lead trust is a powerful charitable planning tool that provides the grantor tax benefits for income, gifts, and/or estate transfers. It also provides charitable organizations with an income stream throughout the trust term. Charitable lead trusts are used by individuals who desire an income tax deduction to offset current year taxable income or who desire to reduce or eliminate federal estate and gift taxes from transferring their wealth to heirs.

Unlike charitable remainder trusts, charitable lead trusts are not tax-exempt, and therefore annual trust income is either taxed to the grantor (for grantor lead trusts) or to the trust (for non-grantor lead trusts.

Our charitable lead trust questionnaire can help you determine if a charitable lead trust is appropriate for you. Click the button below to fill out the questionnaire, or keep reading for more
helpful information.

Take the Find Your Fit Questionnaire

How does a Charitable Lead Trust Work?

If a charitable lead trust appears right for you, Ren offers the following assistance. First, we determine which type of charitable lead trust you should consider — a grantor lead trust or a non-grantor lead trust.

With a grantor lead trust:

  • The main benefit is an immediate income tax charitable deduction.
  • The donor is considered the owner of the trust for income tax purposes.
  • The donor receives a tax deduction based on the present value of the future payments that will be made to the charitable beneficiary.
  • Because the trust is a grantor trust for federal income tax purposes, the grantor will be taxed on income realized by the trust each year.
  • Investing trust assets in tax-exempt investments may help minimize realized taxable income
    to the donor.

 

For a non-grantor lead trust:

  • The main benefit is to reduce or eliminate gift or estate taxes to the donor.
  • The trust is considered the owner of the assets for federal income tax purposes.
  • The trust pays tax on undistributed net income and claims the income tax charitable deductions for its annual distributions to the charitable beneficiaries.
  • The grantor cannot claim an income tax deduction for the trust’s annual distributions to charity.
  • The lower the remainder value of the trust, the lower any potential gift tax costs.
  • If the assets of the non-grantor charitable lead trust appreciate enough, the value of excess investment assets of the trust could be transferred to one or more designated beneficiaries free of estate or gift tax.

Once the type of trust is determined, we help you decide the most effective contributions for funding the trust. This includes evaluating the annual charitable distributions, the length of the trust term, and who the non-charitable beneficiaries will be. Our goal is to help you achieve your philanthropic goals.

Charitable Lead Trust Downloadable Resources

Charitable Lead Trust Handbook

An in-depth guide to the workings and variations of charitable lead trusts.

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Donor Story

John and Linda Davidson use a charitable lead trust to reduce income and estate taxes.

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Gift Summary

Download a PDF version of this page.

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FAQs

Charitable remainder trusts are conceptually the inverse of charitable lead trusts. Charitable lead trusts distribute income to charitable beneficiaries annually for the term of the trust, and when the term expires, distribute the remainder of the trust’s assets to non-charitable beneficiaries. In contrast, charitable remainder trusts distribute income to non-charitable beneficiaries, such as family members, for the term of the trust. When the term expires, the trust distributes the remaining trust assets to charitable organizations.

Cash, publicly traded stocks, real estate, and other complex assets may fund a charitable lead trust. Note that non-liquid assets may need to be sold or coupled with a cash donation to ensure that the trust has adequate resources to make required annual distributions.

Yes, naming a donor-advised fund as the lead beneficiary allows you to maintain advisory privileges over the charitable funds, providing oversight over the distribution of charitable grants. You also retain the charitable lead trust reduced gift or estate tax benefits when you pass the assets along to your heirs.

No. The income from a charitable lead trust is either taxed to the grantor (grantor lead trust) or the trust (non-grantor lead trust).

Most grantor charitable lead trusts are structured so the grantor retains a reversionary interest, meaning the grantor receives the remainder assets. For non-grantor lead trusts, a designated beneficiary other than the grantor will receive the remainder assets.

How to Get Started with a Charitable Lead Trust

Are you ready to have a charitable conversation? Fill out our contact form today!