Accounting and Consulting

Charitable lead trusts

By Lisa Murton Beets

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Gregg R. Fortune, CFP^®, CFS, AEP
Managing member
Prosperitas Financial Advisors, LLC

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If you have a philanthropic heart and have not yet considered a charitable lead trust (CLT), now is an ideal time to review this strategy for giving either during your lifetime or upon your death through your will.

“A CLT is a very attractive option during the current low interest rate environment, enabling you to either take a sizeable income tax deduction now and/or reduce the size of your estate,” says Gregg R. Fortune, CFP®, CFS, AEP, managing member of Prosperitas Financial Advisors, LLC, Bloomfield Hills.

Smart Business asked Fortune for more information about this beneficial option for those seeking a creative way to give.

What types of charitable trusts are there?

There are two types: the charitable remainder trust (CRT) and the charitable lead trust (CLT). The CRT is more familiar, but the CLT offers many attractive benefits worth considering. A CLT lets you donate the income stream from an asset to a charity for a set number of years. You determine who gets what assets when and at what percentage. The remaining appreciation goes to the person who established the CLT or his or her family members.

Are there variables of CLTs?

Yes. There is a charitable lead unit trust (CLUT) and a charitable lead annuity trust (CLAT). A CLUT gets valued once a year and the proceeds are ‘sprinkled’ at the set percentage. Say you have a property worth $2 million. You sell it for cash. You specify the charity’s payout rate as 5 percent (so the charity gets $100,000). You invest the rest of the money in whatever you choose (securities, bonds, etc.). Every year, the charity gets 5 percent based on the investments’ performance, so the amount will vary every year.

With a CLAT, the valuation is done once, at the beginning. If you specify that 5 percent will go to the charity every year, the same amount goes to charity regardless of performance.

Are there different ways to set up the CLT?

There are two ways: grantor and non-grantor. You can set up a CLAT or a CLUT using either of the two. A grantor lead trust gives you a much larger tax deduction. The deduction is calculated based on the income stream going to the charity and is based on IRS tax tables that are tied to interest rates. Because we are in a low interest rate environment, the tax deduction is very high right now.

With a nongrantor lead trust, there is no income tax deduction currently, but it does allow you to reduce the size of your estate. With this method, you can specify that the charity receive income for a set number of years, at which point the asset will transfer to a family member(s).

Provide some specific examples of how a CLT works.

Say you purchased a lot on a lake many years ago. You built a summer house on the lot, which you rent out. Your grandchildren are in their late teens. You establish a CLT, which allows you to donate the stream of income coming in from the rental for 10 years. After that, the property will then go to your grandchildren, who by then will be old enough to manage it wisely. In this example, the CLT serves as a nice delay trigger to keep the asset in the family and also enables you to achieve some tax benefits.

Here’s another example: Say you own a growing business that is currently worth $20 million. Your shares are about $15 million. Your children are in their early 20s and are just beginning to work in the business. You can donate your ownership interest and distribute the income to charity for 10 or maybe 20 years, at which point it will transfer to your children who by then will be mature enough to take over the business. Estatewise, you’ve ‘frozen the value.’ If the business grows to $70 million during that time, your estate will not have to pay the tax on that growth when the children inherit the business.

How flexible are CLTs?

As we discussed, CLTs are very flexible upfront. However, once established, they are irrevocable. You can get very creative with a CLT. You can select one or more charities, pool a grouping, or even create your own foundation. You can even give jobs to your family members, working for a foundation that you create. Finally, while various types of property can be used to fund a CLT, consideration must be given to avoid UBTI (unrelated business taxable income) to maximize the charitable contribution.

GREGG R. FORTUNE, CFP®, CFS, AEP, is a managing member of Prosperitas Financial Advisors, LLC, Bloomfield Hills. Reach him at (877) 540-5777 or grf@cendsel.com.