Planning with charitable lead trusts.

• Author: Westley, Robert A.

Many high-net-worth individual taxpayers are charitably inclined and endeavor to taxoptimize their philanthropic goals. The opportunity for charitable planning in today's environment is immense and ranges from donating simple cash gifts to deploying sophisticated trust structures. Furthermore, the convergence of historically low interest rates and volatile financial markets creates unique opportunities for those with charitable goals. Tax advisers guiding high-net-worth taxpayers will be well served by sharpening their planning knowledge of current charitable giving tools and techniques. This column focuses on an often-underused planning technique, the charitable lead trust (CLT).

General overview

CLTs are a powerful planning tool that can prove to be a tax-efficient way for a taxpayer to fulfill goals of both charitable giving and family wealth transfer. A CLT is a charitable splitinterest trust that can be created during life or at death, under a revocable trust or will. The lead income interest is paid to the charitable organization, and the remainder interest is transferred to a noncharitable beneficiary (e.g., the donor, the donor's family). The income interest can be in the form of a "guaranteed annuity" interest (a charitable lead annuity trust (CLAT)) or it is a "unitrust interest" (a charitable lead unitrust (CLUT)).

For income tax purposes, CLTs can be drafted either as a grantor trust or as a nongrantor trust. If it is structured as a grantor trust, the donor receives an upfront charitable income tax deduction on formation of the trust and is then responsible for income taxes on future trust income. If it is structured as a nongrantor trust, a separate taxpaying trust is created and allowed an unlimited charitable income tax deduction under Sec. 642(c) for the income paid to charity. It is important to note that donors to a nongrantor CLT do not receive a charitable itemized income tax deduction.

The CLT is composed of the charitable interest, which is wholly deductible for gift and estate tax purposes, and the noncharitable remainder interest, which is wholly taxable for gift or estate tax purposes. The value of the charitable interest is calculated as the present value of the stream of payments to the charity over the charitable term (the computation of this present value is discussed next). The value of the taxable remainder interest is the difference between the trust's initial value and the value of the charitable interest.

Comprehensive CLAT example

A is charitably inclined, faces a large estate tax, and wants to support her favorite charity during her lifetime. She creates a 10-year-term CLAT that is funded with $10 million, which will make yearly payments of a $1 million annuity to her chosen charity and pay the remainder to a trust for the benefit of her son, S. The value of the charity's annuity can be figured using the appropriate Sec. 7520 rate and Table B, "Term Certain Factors," of IRS Publication 1457, Actuarial Valuations.

Assume that the valuation date occurs during September 2021, when the Sec. 7520 rate is 1% (per Rev...