Charitable Lead Trusts: Tool for Tax Efficient Wealth Management

Originally published by Paul Romano.

Success doesn’t reside in a vacuum. In many cases, the same sort of drive, energy, and vision that produces prosperity is accompanied by a strong, personal desire to help others. If only there was a vehicle to make a large gift to a charitable or educational organization, enjoy the associated tax break provided by that deduction, and yet still eventually leave some of that gift to family members at one’s death. There is such a vehicle: A charitable lead trust (CLT). Properly drawn, it can be an important part of managing one’s wealth.

Charitable Remainder Trust in Reverse

For most intents and purposes, a CLT is a charitable remainder trust in reverse. Through a CLT, the charitable organization receives an income stream for a discernable time period – for example, 20 years or perhaps for the lifetime of the donor. At the end of that time period (or upon the donor’s death, for example) any remaining income or principal flows back to the donor or, more typically, to other beneficiaries designated in the trust. An important point here: Those beneficiaries need not be charitable organizations themselves; they can be one’s heirs.

CLT Example

The following hypothetical example shows how a CLT might work. The donor might put a significant amount, say $1 million, into a 20-year CLT favoring his or her favorite college or university. The trust instrument might provide that the university is to receive $50,000 each year. At the end of the trust term, the CLT might provide that anything left is transferred to the donor’s children.

The IRS, using what is referred to as a “hurdle rate” (geared to U.S. Treasury rates and set annually) in effect at the time the trust is established, makes a determination that after 20 years, there will be about $115,000 left for the children. That amount is subject to gift and estate tax, but since it is beneath the allowed exemption, no tax is due at the time the trust is created.

If after 20 years there is more that $115,000 remaining in the trust – this can happen if the trust is funded with assets that are likely to appreciate significantly – the amount flowing to the children is not subject to estate tax. Bear in mind, of course, that if the CLT’s investment performance is poor, there may be less than $115,000 – or even nothing at all – remaining for the children.

Charitable Lead Trusts Can Allow Tax Savings and Some Principal Preservation

If carefully crafted, CLTs can be a useful tool in wealth management. Usually, CLTs are drafted so as to be used in conjunction with other wealth management documents, as well as a will and various trust instruments. Through the use of a CLT, a benefactor can provide support for a worthy charity or educational institution, and yet still preserve assets for distribution to family members.

The attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of wealth management and estate planning. We have expertise in the creation of all sorts of Texas trust documents, and stand ready to assist you in managing your important assets. At Romano & Sumner, we never use a cookie cutter approach. We listen to you and offer multiple alternatives that will help you maneuver through the complicated tax and legal arena. We pride ourselves upon our professionalism and client service. We keep our clients informed, returning your calls within 24 hours. We’re ready to assist you as you make the important decisions that affect your family. Call us at 281-242-0995 or complete our online contact form.

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