There are many kinds of charitable trusts out there but you won’t hear much about charitable lead trusts, largely for the reason that they are often overlooked by many estate planning lawyers and financial planners.

The charitable remainder trust still remains the charitable giving tool of choice, but the charitable lead trust can still have many benefits for the right people and in the right situations.

In a manner of speaking, the charitable lead trust (CLT) is the inverse of a charitable remainder trust (CRT). But it’s more technical than that, so I’ll do what I can to simplify the concepts in a short blog post.

A charitable lead trust is set up in such a way so as to provide a set income to a charity for a set period of time.

In essence– the charity gets paid from the trust, for a certain number of years. That’s in the simplest of terms.

The trust documents set an amount for the charity to receive each year. If and when the income paid to the charity falls below the amount specified in the charitable lead trust documents, the charity can “invade the principal” of the trust and pay itself the amount it is entitled to receive under the trust documents.

At the end of the term, the remaining principal goes to the final beneficiaries, usually family members of the grantor.

CLTs have their tax advantages. The grantor (ie the person who set up the trust) can take an allowable income tax deduction on the income amount that the charity is expected to receive over the term of the trust, based on IRS actuarial tables .

There are some pitfalls, however. While there is a deduction on the long-term amount that the charity is expected to receive, the grantor must pay income tax on the income that the charity actually receives every year!

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About the Author:

Maryam K. Ansari is a practicing tax lawyer in San Francisco, with a focus on exempt organizations.  Maryam has set up several public charities, counselled on charitable giving and has worked on complex private foundation joint venture LLCs. She has been published numerous times, most notably by Thomson Reuters Taxation of Exempts and in FindLaw’s estate planning news blogs. She is licensed to practice in New York and California and is an LLM Tax candidate at Golden Gate Law School, with a J.D. from the University of Ottawa (2004).