Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 1

Planning with Charitable Lead Trusts and Charitable Remainder Trusts

Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts

(CRTs) are called “split interest” trusts because they have both

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Although some of the basics of CLTs and CRTs are similar, they

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Charitable Lead Trusts

Technically, a CLT is a split-interest trust with a charitable

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FLDU\DOVRNQRZQDVWKH´OHDGµEHQHÀFLDU\JHWVSHULRGLFXVXDOO\annual) payments for the term of the trust, and the noncharitable

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One of the major reasons to create a CLT is to reduce or eliminate

JLIWDQGHVWDWHWD[HV&/7VFUHDWHRSSRUWXQLWLHVWKURXJKERWKWKHtax laws and straightforward mathematics, leading to interesting

and surprising results: Anyone planning to leave money both to

charity and to heirs at death will pay estate tax only by default

(through bad planning) or through a conscious decision not to

UHGXFHWKHLUHVWDWHWD[ELOO3XWDQRWKHUZD\DQ\RQHSODQQLQJWRleave money to charity and heirs can, assuming reasonable invest-

ment returns, give some calculable amount to their heirs free of

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bining the CLT with a private foundation sweetens the deal even

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2 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts

,QFUHDWLQJD&/7WUHPHQGRXVÁH[LELOLW\LVSRVVLEOH7KH&/7FDQbe heavily weighted toward charity, with the gift/estate tax ben-

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'XULQJPXFKRIWKHGHFDGHRIWKHVLWVHHPHGSRVVLEOHWKDWWKHHVWDWHWD[ZRXOGJRDZD\DVLWGLGIRUDVLQJOH\HDULQ,Qfact, many countries, including our nearest neighbors Canada and

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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 3

VHQFKDULW\HDFK\HDU%XWGHSHQGLQJRQKRZWKH&/7LVVHWXSKHwill also get an immediate income tax deduction on setting up the

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A CLT can be set up as a grantor trust, that is, a special type of

trust that for most purposes does not pay income taxes and instead

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Determining which type of trust is appropriate will depend heav-

LO\RQWKHSDUWLFXODUFLUFXPVWDQFHVRIWKHWUXVWRU$JUDQWRU&/7gives the grantor an up-front income tax deduction equal to the

present value (calculated according to rates set by the IRS) of the

JLIWVODWHUJLYHQWRFKDULW\%HFDXVHZHDUHQRWH[DPLQLQJWKH&/7as a planning vehicle for income tax reduction, for simplicity we

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/HW·VUHYLHZZKDWKDVKDSSHQHGWith the CLT, the father pays

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Without WKH&/7WKHIDWKHUNHHSVWKHPLOOLRQOHWVLWJURZIRU\HDUVWRPLOOLRQDQGWKHQJLYHVLWWRKLVFKLOGUHQ7KHHVWDWH

_Planning with Charitable Lead Trusts and Charitable Remainder Trusts

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&RQFOXVLRQWKH&/7DOORZVWKHNLGVWRJHWDERXWWKHVDPHDPRXQWthey would have received anyway, but allows the donor also to

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people would rather have money now instead of later and demand

WREHSDLGLQWHUHVWLIWKH\PXVWZDLW/XFNLO\IRUGRQRUVWKHWD[code recognizes the time value of money and tells us exactly how

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PHQWEDVHVLWRQJRYHUQPHQWERQGUDWHV7KDW·VDERQXVIRUKHLUVbecause if you assume that most long-term investors in equities

can expect to earn returns much higher than the returns on gov-

ernment bonds, the government is passing this extra growth along

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If a CLT is a home run for planning, combining a CLT with a pri-

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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 5

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ciary, the donor must not end up in control of the funds given by

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Another advantage of this combined strategy is that the private

foundation needs to distribute only 5 percent of its assets each

\HDU7KLVPHDQVWKDWWKHIRXQGDWLRQ·VDVVHWVFDQJURZWRR,QRXUoriginal CLT example, if both the CLT assets and the foundation

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In short, a CLT, when combined with a private foundation, is a

YHU\SRZHUIXOFKDULWDEOHDQGWD[SODQQLQJWRRO:KLOHWKHFRQFHSWVare straightforward enough for nontechnically minded donors, the

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3HUKDSVPRVWVWULNLQJDERXWWKLVVWUDWHJ\LVWKDWJLYHQDQ$)5Dtrust term, and an anticipated rate of return, the effective tax rate is

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CLTs Can Cut the Estate Tax Rate

ŶŶƵĂůWĂLJŵĞŶƚ EĞƚƚŽ,ĞŝƌƐĂƚ īĞĐƟǀĞto Charity End of Trust Term Tax Rate

8% ($80,000) $1.5 million 1.4%

7% ($70,000) $2.0 million 4.0%

6% ($60,000) $2.5 million 5.6%

5% ($50,000) $3.0 million 6.6%

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The table above illustrates that for a person willing to commit in

_Planning with Charitable Lead Trusts and Charitable Remainder Trusts

advance to dividing his estate between charity and children, the

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out planning, while charity got money that would otherwise have

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$Q\WLPHDGRQRULQWHQGVWROHDYHDVLJQLÀFDQWDPRXQWWRFKDU-ity upon his death and the remainder (less taxes) to heirs, a CLT

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DJHGHVWDWHWD[EHQHÀWEHFDXVHWKHRQO\HVWDWHWD[EHQHÀWLVWKHcharitable contribution deduction against the value of the taxable

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7KLVFDQEHLOOXVWUDWHGE\UHYLVLWLQJRXUHDUOLHUH[DPSOH6XSSRVHour hypothetical father has determined to leave 25 percent of

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Charitable Remainder Trusts

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bly-minded individuals who own appreciated property are often

advised to create a CRT because a CRT allows the tax-free sale of

DSSUHFLDWHGSURSHUW\LQVLGHWKHWUXVW+RZHYHULQPDQ\FDVHVthey might be better off simply selling the property and using the

SURFHHGVWRIXQGDSULYDWHIRXQGDWLRQRURWKHUFKDULWDEOHHQWLW\To determine which strategy is better, it helps to understand how

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The amount of the tax deduction is determined by four variables:

the value of the assets placed in trust; the present value of the

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Because a CRT can be used to defer capital gains tax, it is particu-

_Planning with Charitable Lead Trusts and Charitable Remainder Trusts

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Planning with Charitable Lead Trusts and Charitable Remainder Trusts_

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Issue Contribute $5 Million Contribute $500,000 to a ŽĨ^ƚŽĐŬƚŽZhd WƌŝǀĂƚĞ&ŽƵŶĚĂƟŽŶĂŶĚ^Ğůů ΨϰϱDŝůůŝŽŶŽĨ^ƚŽĐŬ;EŽZdͿ

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_Planning with Charitable Lead Trusts and Charitable Remainder Trusts

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ciary duty not only to the donor, but also to the charitable remain-

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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 11

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12 | Planning with Charitable Lead Trusts and Charitable Remainder Trusts

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Flexibility and Irrevocability

In the past, one of the biggest barriers to setting up a CRT or CLT

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Planning with Charitable Lead Trusts and Charitable Remainder Trusts | 13

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Sterling Foundation Management, LLC does not provide tax or legal advice, and noth-ing in this document is to be construed as such. Any information or analysis provided is believed to be accurate but is not guaranteed or warranted.

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Hoboken, nJ²-RKQ:LOH\6RQVKDVUHOHDVHGManaging Foundations and Charitable TrustsE\5RJHU'6LON3K'DQG-DPHV:/LQWRWW(VT7KLVYROXPHLVWKHVHFRQGHGLWLRQRIWKHLUFULWLFDOO\DFFODLPHGERRNCreating a Private Foundation.

What They’re Saying About Managing Foundations and Charitable Trusts

Available on Amazon.com or

Wiley.com.

New chapters include:

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“A copy…should be in the library of every

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“This remarkably readable, yet complete and authoritative book helps guide both novices and experts through these poten-tially confusing areas. Anyone who has a foundation or a CRT RULVFRQVLGHULQJRQHZLOOÀQGit helpful.”

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Family Foundation Advisor

“After nearly four decades of counseling wealthy families…, KDYH ÀQDOO\ IRXQG WKH SHUIHFWtool for my clients in the imple-mentation and maintenance of their charitable giving…a must for inclusion in the library of any foundation manager.”

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