Nixon Peabody LLP

  • People
  • Capabilities
  • Insights
  • About

Trending Topics

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni

    Practices

    View All

    • Affordable Housing
    • Community Development Finance
    • Corporate & Finance
    • Cybersecurity & Privacy
    • Environmental
    • Franchising & Distribution
    • Government Investigations & White Collar Defense
    • Healthcare
    • Intellectual Property
    • International Services
    • Labor & Employment
    • Litigation
    • Private Wealth & Advisory
    • Project Finance
    • Public Finance
    • Real Estate
    • Regulatory & Government Relations

    Industries

    View All

    • Cannabis
    • Consumer
    • Energy
    • Entertainment
    • Financial Services
    • Healthcare
    • Higher Education
    • Infrastructure
    • Manufacturing
    • Non Profit
    • Real Estate
    • Technology

    Value-Added Services

    View All

    • Alternative Fee Arrangements

      Developing innovative pricing structures and alternative fee agreement models that deliver additional value for our clients.

    • Continuing Education

      Advancing professional knowledge and offering credits for attorneys, staff and other professionals.

    • Crisis Advisory

      Helping clients respond correctly when a crisis occurs.

    • DEI Strategic Services

      Providing our clients with legal, strategic, and practical advice to make transformational changes in their organizations.

    • eDiscovery

      Leveraging law and technology to deliver sound solutions.

    • Global Services

      Delivering seamless service through partnerships across the globe.

    • Innovation

      Leveraging leading-edge technology to guide change and create seamless, collaborative experiences for clients and attorneys.

    • IPED

      Industry-leading conferences focused on affordable housing, tax credits, and more.

    • Legal Project Management

      Providing actionable information to support strategic decision-making.

    • Legally Green

      Teaming with clients to advance sustainable projects, mitigate the effects of climate change, and protect our planet.

    • Nixon Peabody Trust Company

      Offering a range of investment management and fiduciary services.

    • NP Capital Connector

      Bringing together companies and investors for tomorrow’s new deals.

    • NP Second Opinion

      Offering fresh insights on cases that are delayed, over budget, or off-target from the desired resolution.

    • NP Trial

      Courtroom-ready lawyers who can resolve disputes early on clients’ terms or prevail at trial before a judge or jury.

    • Social Impact

      Creating positive impact in our communities through increasing equity, access, and opportunity.

    1. Home
    2. Insights
    3. Articles
    4. Why use a Charitable Lead Trust (CLT)?Articles

    Article

    Why use a Charitable Lead Trust (CLT)?

    June 11, 2019

    Share

    By Deborah Anderson

    Use of a Charitable Lead Trust (CLT) can accomplish multiple goals of income, gift and estate tax savings while providing benefit to charity as well as family members.
    A Charitable Lead Trust (“CLT”) can be established during your life (“inter vivos”) or after your death (“testamentary”). In both types of CLTs, charitable gifts are made out of the trust for a period of years, then, at the end of that period, assets pass to designated family members or others.

    A CLT with terms that provide for annuity payments (a fixed percentage of the fair market value of the property transferred to the trust as of the date of the transfer) is known as a charitable lead annuity trust (“CLAT”). A CLT with terms that provide for a unitrust amount (a fixed percentage of the fair market value of the trust property as that value is re-determined annually during the lead term) is known as a charitable lead unitrust (“CLUT”).

    Charitable Lead Trusts established during lifetime

    At the time the grantor transfers property to the CLT, the grantor is treated as having made a charitable gift equal to the present value of the stream of the annuity or unitrust payments to be paid to the charity. The present value of this stream is determined by applying a discount rate (equal to 120% of the federal AFR mid-term rate in effect for the month during which the grantor makes the transfer) to the aggregate payments to be made to the charity. The lower the AFR rate, the lower the discount rate, and the higher the present value of the revenue stream to be paid to charity. Additionally, at the time the grantor transfers property to the CLT, the grantor is treated also as having made a noncharitable gift to the remainder beneficiaries. The higher the present value of the revenue stream to be paid to charity, the lower the present value—and therefore the gift tax value—of the property transferred to the remainder beneficiaries.

    If you establish an inter vivos CLT during your lifetime, you, as the grantor of the trust, are not entitled to a charitable income tax deduction for funding the trust unless it is treated as a grantor trust and therefore you are responsible for paying all of the CLT’s income taxes during the term of the trust. If the CLT is treated as a non-grantor trust, you are not entitled to a charitable income tax deduction but you are entitled to a gift tax charitable deduction for the value of the charitable lead interest.

    Charitable Lead Trusts established at death

    A testamentary CLAT, established at death, is typically used as a way of accomplishing not only a charitable giving goal but also the goal of passing assets on to next generation family members at a lower estate tax cost. The Grantor’s estate would be entitled to an estate tax charitable deduction for the value of the charitable lead interest. Since the property is included in the grantor’s estate, it would result in there being a stepped-up basis in the property contributed to the trust, which would eventually pass to the non-charitable beneficiaries. It is possible to establish a sufficiently long charitable lead interest so that the estate tax charitable deduction is equal to the full value of the trust corpus, thereby totally eliminating estate tax with respect to the trust corpus. This is called a “zeroed out” CLAT. In the case of a zeroed out CLAT, the remainder noncharitable beneficiaries receive is the upside of the economic performance of the trust assets over and above the AFR rate on an estate tax free basis. When interest rates are low, the likelihood that the trust assets will outperform the AFR rate and the remainder beneficiaries will receive excess trust property gift tax free at the end of the lead term increases. This is more difficult to accomplish when interest rates are higher.
    Trusts And EstatesDomestic

    Subscribe to stay informed of the latest legal news, alerts, and business trends.Subscribe

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    • © 2023 Nixon Peabody. All rights reserved
    • Privacy Policy
    • Terms of Use
    • Statement of Client Rights
    • Supplier Diversity Program
    • Nixon Peabody International LLC
    • PAL