Tomorrow, your current and future donors will gather with loved ones to give thanks for all the good in their lives. Charitable giving is simply a way to turn that gratitude into action. For those who are moved to support your organization, you have a critical role to play in helping them meet their charitable giving goals in a way that is tailored to their overall planning needs.
Donors who have been blessed with wealth often want to make an important difference while providing for heirs and minimizing taxes. In these circumstances, don’t forget to mention the charitable lead trust (CLT). In initial conversations with donors who might benefit from this giving tool, you’ll want to hit on several key points.
A Simple Explanation
A CLT works like this:
• The donor makes an irrevocable transfer to the trust (often appreciated stock or marketable securities with strong growth potential) and selects both the charity and the beneficiaries to receive what remains in the trust at the end of the trust term.
• The trust makes annual payments to the chosen charity—fixed payments in the case of a charitable lead annuity trust (CLAT) and variable payments in the case of a charitable lead unitrust (CLUT).
• These payments continue to the charity for a fixed term or for the donor’s lifetime.
• At the end of the trust term, the trust pays out the remaining assets to named family members.
Powerful Benefits
While setting up a CLT requires more effort and expense than many gift options, some donors find it a useful and flexible way to accomplish multiple goals.
1. Provide significant support for your organization over a period of time. This can be a great way to make an extended impact on your mission.
2. Pass more wealth to loved ones. It can also be an efficient way to provide for heirs. If the assets in the CLT increase in value over the course of the trust term (possibly by a significant amount), no tax is due on the appreciation.
3. Minimize estate and gift taxes. For wealthy donors, this is an important factor to consider. Here, the size of the deduction for gift and estate tax purposes is based on the amount paid out to your organization, the length of the trust term, and the applicable federal rate at the time the donor establishes the trust.
A Reason to Act Soon
A CLAT is a particularly attractive option when the applicable federal rate (AFR) is either low or expected to decrease. As the trust principal appreciates in excess of the AFR, a greater portion of the trust will be passed to heirs on a tax-advantaged basis.
The AFR for December 2024 will be 5.03%, but the rate has decreased several times over the past months (down from 5.79% in December 2023) and is expected to continue decreasing as inflation cools. As the AFR decreases, the CLAT becomes an even more powerful tool.
Important Tax Considerations
The tax rules surrounding a standard, nonreversionary CLAT are complex, but the basic facts are these:
• The transfer to the trust does not qualify for an immediate income tax deduction for the donor, but the trust itself is allowed unlimited charitable deductions for amounts paid out to charity.
• The donor is not taxed on the appreciation of any capital assets or income earned by the trust. Instead, income and capital gains generated are taxed to the trust itself.
Flexibility in Implementation
To help donors meet their precise needs, CLTs come in several variations. The primary choice is between a CLAT and a CLUT. However, one alternative is the grantor lead trust. This may be a good fit for donors who want an immediate charitable deduction or prefer not to transfer assets to heirs at the end of the trust term. The key features include:
• Assets remaining in the trust at the end of the trust term revert to the donor or the donor’s spouse.
• The donor receives an immediate income tax deduction upon funding the trust equal to the present value of the annuity payments that will go to the charity.
• The donor is liable for paying tax on income and appreciation inside the trust.
Helping your donors find the right charitable giving option can be challenging, but it doesn’t have to be as difficult as perfecting that family recipe for pumpkin pie. Keep the charitable lead trust in mind in the coming months. If the AFR keeps dropping, the flexible CLT will become an even more powerful way for wealthy supporters to make an immediate and ongoing difference in your work and the financial security of their heirs. And for the right donors, that is certainly something to be grateful for!
