CLUT, CLUT, CLAT
We have previously looked at charitable remainder trusts and their role in philanthropic giving. Now let’s look at the other side of the coin: charitable lead trusts. While a charitable remainder trust combines a present non-charitable interest with a remainder interest that passes to charity, a charitable lead trust is a charitable interest followed by a non-charitable remainder.
With a charitable lead trust, the organization doesn’t have to wait until the expiration of the non-charitable interest but rather receives the interest at the start. As with remainder trusts, there are requirements governing lead trusts.
Properties of CLUTs and CLATs
For starters, a charitable lead trust can be a charitable lead annuity trust or a charitable lead unitrust.
A CLAT pays a set annuity to the charity during the trust term. The trust can stipulate that income earned in excess of the annuity should be paid to the charity. However, the value of the charitable deduction will be limited to the value of the annuity interest.
A CLUT pays a specified percentage annually based on the fair market value of the trust principal. With a CLAT, the amount passing to the charity each year doesn’t change. With a CLUT, the amount will change depending on the investment performance of the trust assets.
Charitable lead trusts have another variation that charitable remainder trusts do not: It can be either a grantor or a non-grantor trust. (A grantor trust is ignored for federal income-tax purposes.) If the charitable lead trust is a grantor trust, the settlor can claim an income tax deduction when the trust is created equal to the value of the charitable interest.
However, because the trust is a grantor trust, the settlor will be taxed on the income earned during the term — even though income may be paid to the charitable organization.
Lisa B. Petkun is a partner in the tax department at Pepper Hamilton LLP.