A lead trust is a trust that [1] makes payments to one or more charities for a donor-prescribed period, and then [2] distributes its assets to one or more persons. It’s called a lead trust because the charitable interest in the trust leads, or precedes in time, the non-charitable interest.
Certain lead trusts work well from a tax standpoint in a low interest rate environment. Other lead trusts work well as a way to transfer assets to grandchildren. To understand the details here is to possess sophisticated gift planning knowledge.
To understand the detailed hows and whys of lead trusts, we need to narrow our focus. Let’s do that first by looking at the two kinds of lead trusts.
Lead trusts come in these basic flavors:
- the charitable lead annuity trust (CLAT), and
- the charitable lead unitrust (CLUT).
Note: These are the only two flavors allowed by federal tax law.
The CLAT makes fixed annuity-type payments to charities for a donor-prescribed period (e.g., $50,000 a year for 15 years), and then distributes its assets to one or more persons (e.g., the donor’s children). The CLUT works the same basic way except that the payout to charity is a unitrust payout (e.g., the trust pays to charity each year 5% of its annually determined asset value).
Note: There is no minimum or maximum payout rate for a CLAT or a CLUT.
Over the years, far more CLATs than CLUTs have been created. The reason, believe it or not, has to do with interest rates. It turns out that the CLAT provides greater bang-for-the-buck in a low interest rate environment. Such as the environment that currently exists in the U.S. (and worldwide).
This is where we’ll pick up next time, when we’ll begin to develop a pretty good understanding of the CLAT.
By Jon Tidd
Read Pt 2 here
Read Pt 3 here
Read Pt 4 here
Read Pt 5 here
Read Pt 6 here
