Sophisticated. Successful. Multifaceted

  1. Home
  2.  → 
  3. Firm News
  4.  → Charitable lead trusts can be a win-win

Charitable lead trusts can be a win-win

On Behalf of | Sep 24, 2021 | Firm News, Trusts And Estates |

Charitable lead trusts are giving techniques that double as a wealth transfer and support of a favorite non-profit. They can be a useful mechanism after typical details like health care directives, power of attorney and a will are done.

How does it work?

The details of the estate and CLT will vary, but the individual or couple can determine an amount that the trust pays out (say 5%) annually to charity for a specific number of years or until the death of one or both spouses. The remaining money in the trust may then be transferred to the children or to other beneficiaries that are not a non-profit. The amount gifted to charities is immediately deducted from the value of the gift. It can make for effective mitigation against wealth transfer taxes.

Still potential to grow

There is also the added benefit of still growing the trust. For example, say that the couple pays 5% to charity, but the market returns are closer to 9%, the trust continues to grow by 4%. Of course, there is market uncertainty, so some may not be comfortable with this balancing act. But, that 5% payment over several years can provide the benefit of much lower taxes.

It may not be a big deal if the couple falls under the threshold for federal and state estate taxes, but the CLT could keep the estate from jumping to the next level with a much higher tax burden – this can be the difference of hundreds of thousands of dollars. The asset is secure in a trust while still avoiding capital gains tax if stocks or real estate are sold. Of course, there is still the legacy building arm of the CLT that provides a steady income to that important non-profit over many years.

The results of a CLT will vary, and the rules are complex. However, it may be a viable option for philanthropically minded families who still wish to pass money to their children, grandchildren, or other family members.