Charitable Lead Trusts

While charitable remainder trusts provide an income stream to noncharitable beneficiaries and remainder interests to charity, charitable lead trusts work the other way. They provide charitable organizations an immediate annual cash flow. At the end of the trust term, the assets in the trust are either returned to the donor, or are passed to noncharitable beneficiaries specified by the donor.

Charitable lead trusts come in two basic flavors; "grantor" trusts and "non-grantor" trusts. There are also available in a "swirl" that combines features of both grantor and non-grantor type trusts.

Generally speaking, donors to grantor charitable lead trusts received a current federal income tax deduction for the present value of the future income stream that will flow to charity. Donors are taxed on the income generated within the trust even though it passes to charity. There generally is no gift or estate tax benefit from a grantor lead trust. The benefit from using this type of instrument is the present value of an income tax deduction compared to the present value of future income taxed at perhaps a lower tax rate.

Donors to non-grantor charitable lead trust generally do not receive an income tax deduction for the income stream that they gift to charity, but neither are they taxed on the trust income. In lieu of income tax deductions, these donors receive transfer (gift, estate, and generation-skipping) tax benefits on the future transfer of assets to other individuals (usually other family members, frequently in a lower generation).

With the "swirl" flavor (technically, a defective non-grantor lead trust), the donor gets both an income tax deduction, and transfer tax benefits. These gift vehicles work well only in limited circumstances.

Charitable lead trusts are subject to some of the provisions applicable to private foundations. Under these rules, the governing instrument must include provisions prohibiting self-dealing and taxable expenditures.

Charitable lead trusts are rather technical structures, but are very appropriate for donors of any age who have access income that can be channeled to charitable organizations for an extended period. Non-grantor lead trusts offer an excellent vehicle for passing property to lower generations with minimal transfer cost while benefiting the donor's favorite charity.

©2008 Ronnie C. McClure, PhD, CPA