Charitable Lead Trusts

December 10, 2013. I briefly mentioned Charitable Lead Trusts in the last post, so I feel I should probably provide a little clarity on them. For my money, I prefer charitable remainder trusts as better for getting one foot in the water of providing for one’s family while also making a solid donation to charity that is more than a token gesture. Whereas the charitable remainder trust provides for the charity at the end of its life, the charitable lead trust, unimaginatively, provides for the charity at the begging of the trust’s life. The idea being that the trust provides for a charity for a set number of years, and then makes a final distribution to whoever are the remainder beneficiaries, usually family.

There is a fair amount of manipulation that may be attempted with the Charitable Lead Trust, but in the end, I believe it is an instrument that is best used those that honestly want to give and are used to doing so with sizeable assets. During the term of the trust, as either a fixed amount (an annuity) or percentage (unitrust), the trust will make annual payments to the chosen charity. As such, it begins to mirror the style of a donor used to yearly giving. Funded with a significant principal, the earned income can be fairly significant. By moving the assets and income out of the estate, it also obviates the concern over the 50% and 30% deduction ceilings for donations, so in that way is significantly stronger than repeat annual giving.

However, the remainder beneficiaries take a back seat in this scheme. There is, of course, a final payout to them, but it will be a reduced sum. For the term of the trust, it would not provide support or a stream of income, or generally “take care” of one’s family, which is all well if that is not the grantor’s aim. There is also the issue of lost time, which reduces the productive value those assets would have had if they had been inherited sooner; which is just to say that an asset is not as useful to your descendants down the road as it is now. One also has to realize that the eventually inheritors of your property might not be your children, but your grandchildren or an individual in their generation.

In short, the CLT is not the best instrument if one has the dual goals of providing for their family and charity with the same assets, but it is a good tool if used by someone who is largely concerned with charitable giving.

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