Charitable Lead Trust Tax Deduction

There are two types of charitable lead trusts. Each has its own tax benefits.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

What is a charitable living trust?

When you set up a charitable lead trust (CLT), it pays a charity a defined series of payments. At the end, the remaining assets go back to you or your designated beneficiary.

A charitable lead trust is essentially the opposite of a charitable remainder trust. In a charitable remainder trust, the trust pays you or a beneficiary a series of payments, with the remainder going to a charitable beneficiary.

Charitable lead trusts are also virtually the opposite of a charitable gift annuity, where the charity pays you a series of payments before keeping any additional funds invested into the annuity.

How does a charitable lead trust work?

In a charitable lead annuity trust, you establish a legal trust and fund it with cash or other assets.

The trust makes a series of usually fixed payments to the charity from the investment proceeds and/or principal.

At the end of the payments to the charitable beneficiary, either you, a family member, or some other beneficiary you designated receives the remainder of the trust.

What is the difference between a grantor charitable lead trust and a non-grantor charitable lead trust?

A grantor charitable lead trust is a trust that pays you the remaining assets.

A non-grantor charitable lead trust is a trust that pays other beneficiaries, such as designated family members, the remaining assets. Non-grantor charitable lead trusts are usually used for non-charitable beneficiaries because there are often more tax-efficient ways to make a total donation to charity.

Tax Benefits of a Grantor Charitable Lead Trust

The primary benefit of grantor charitable lead trusts is usually the income tax charitable deduction.

When you create a charitable lead trust, you can generally take a charitable income tax deduction equal to the present value of the payments to be made to charity.

The present value depends on the charitable lead interest rate or other IRS discount rate as well as the length of the series of payments. For example, a basic present value calculation of a ten-year series of payments of $1,000 per month with a 5% interest rate is $94,281.35. 

The exact calculations of the income tax charitable deduction may vary based on your situation, so you should ask a tax advisor.

Tax Disadvantages of a Grantor Charitable Lead Trust

You should be aware that since the remaining trust assets revert back to you at the end of the trust, you’re usually considered the owner of the assets inside of the trust for income tax purposes.

You may have to pay income taxes on earnings on trust assets. You also generally can’t withdraw assets from the trust to pay taxes.

Tax Benefits of a Non-Grantor Charitable Lead Trust

The main benefit of creating a non-grantor charitable lead trust is usually avoiding estate taxes and the gift tax. Trust assets are generally not considered part of your estate and are therefore usually not subject to estate tax and typically don’t count towards your gift and estate tax exclusion amount.

Because you make someone else the beneficiary of a non-grantor charitable lead trust, you’re not considered the owner of trust assets for income tax purposes. Therefore, you generally don’t get an immediate income tax deduction when creating a non-grantor trust.

However, your trust generally does get a charitable tax deduction for each year that it makes payments to charity. This is important because a non-grantor trust usually has to file a tax return and pay taxes on its investment earnings.

Talk to Your Tax Advisor

Talk to your tax advisor if you’re considering a charitable lead trust. There are several things you need to consider, including a potential charitable deduction, whether you’ll create taxable income, and whether your estate would be subject to estate tax.

There may also be other ways to contribute to charity that give you a greater tax benefit.

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