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A charitable lead trust (CLT) offers the possibility of making a charitable gift while maintaining an interest in the property or assets that are being gifted. Moreover, the charitable gift provides a stream of income to a charity for a set period, and then the assets in the trust are passed on to the trust's heirs.

Types of Charitable Lead Trusts

Here are some key types of charitable lead trusts.

  • Charitable Lead Annuity Trust (CLAT): The CLAT involves giving a fixed annuity payment to a charity for a specified period. After the trust's term expires, the remaining assets are distributed to the intended beneficiaries.
  • Non-Grantor Charitable Lead Trust: This type of trust is used for charitable giving by corporations or other entities. In a non-grantor charitable lead trust, the grantor does not pay income taxes on the income generated by the trust; instead, the trust pays its taxes.
  • Charitable Lead Unitrust (CLUT): With a CLUT, a fixed percentage of the trust's assets is given to a charity each year for a predetermined term. The amount paid to the charity varies with the trust's asset value. After the trust's term ends, the remaining assets are distributed to the designated beneficiaries.

Why Hire a Charitable Lead Trust Attorney

A pour-over will is designed to ensure that any assets that were not put into the trust during the grantor's lifetime are transferred into the trust upon their demise.

Setting up a trust can help reduce the inheritance taxes your estate must pay before your beneficiaries receive your assets. Trust assets are not considered part of your personal belongings and are not subject to inheritance taxes. Additionally, a living trust allows you to oversee the distribution of your assets to your beneficiaries, unlike a will.

A trust attorney is responsible for creating an effective plan to protect and distribute a trustor's assets to maximize benefits for heirs after their passing. It includes drafting legal documents to protect assets from lawsuits and taxes. The attorney begins by creating a plan based on the client's needs, considering factors such as marital status, children, and potential incapacitation.

The attorney may ask clients a set of questions to gather necessary information before working on four primary documents: a living will and advance directives, a last will and testament, power of attorney, and other trusts. For the last will, the attorney ensures it meets the formalities required for validity and addresses property distribution. A living will outline a client's medical preferences in case of incapacitation, and the attorney's expertise is necessary to create it, as statutory provisions vary by state.

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How to Create a Charitable Lead Trust

Establishing a charitable lead trust involves the following steps:

  1. Determine the Type of CLT. Charitable lead trusts come in two varieties: the charitable lead annuity trust (CLAT) and the charitable lead unitrust (CLUT). The CLAT offers a fixed payment to the charitable organization annually, whereas the CLUT offers a percentage of the trust's value annually. Choosing the right type of CLT is crucial.
  2. Select the Charitable Organization. The next step is to choose a reputable charitable organization that aligns with your values to receive the yearly payments.
  3. Pick the Beneficiaries. Beneficiaries are individuals or organizations that will inherit the remaining assets in the trust once the charitable organization has received payments for the specified time. It's essential to choose trustworthy beneficiaries who will benefit from the assets.
  4. Fund the Trust. Funding the trust necessitates transferring assets such as cash, stocks, or real estate to the trust, which the trustee will manage and distribute payments to the charitable organization.
  5. Draft the Trust Agreement. An experienced attorney must create the trust agreement, which specifies the type of CLT, the charitable organization, the beneficiaries, and the payment schedule.
  6. Choose a Trustee. A trustee who is well-versed in trust management and can effectively manage assets should be appointed.
  7. File the Necessary Documents. The trust must be registered with the IRS, and the trustee must file annual tax returns for the trust.
  8. Monitor the Trust. Once the trust is established, it is important to monitor it regularly to ensure it meets its objectives. This includes monitoring the assets' performance, the charitable organization's payments, and compliance with legal requirements.
  9. Review and Update the Trust as Necessary. Over time, your circumstances and objectives may change. It is important to review the trust regularly and update it as necessary to ensure that it continues to meet your goals and objectives.
  10. Enjoy the Benefits of Philanthropy. Creating a charitable lead trust can provide significant benefits, including supporting charitable causes that are important to you, reducing your tax liability, and providing for your loved ones. By following these steps, you can create a charitable lead trust that supports your values and goals while positively impacting the world.

Advantages and Disadvantages of a Charitable Lead Trust

Advantages

Charitable lead trusts can be established during the grantor's lifetime or as a condition of their will. They are typically used by individuals who want to support charitable causes while providing for their heirs. Below are some advantages of a charitable lead trust.

  • Tax Advantages: Charitable lead trusts offer significant tax benefits. The donor receives a charitable income tax deduction for the current value of the charitable contribution, and any earnings produced by the trust are exempt from taxes.
  • Estate Planning: Charitable lead trusts can also provide significant estate planning advantages. Through a charitable lead trust, the donor can transfer assets to their beneficiaries while decreasing the size of their estate and the estate taxes owed.
  • Charitable Giving: A charitable lead trust enables the donor to support a charitable cause that is meaningful to them while also providing for their beneficiaries.

Disadvantages

Some of the disadvantages of a charitable lead trust are as follows:

  • Complexity: Charitable lead trusts are complicated legal instruments that require the expertise of an experienced estate planning attorney.
  • Loss of Control: After transferring assets to a charitable lead trust, the donor relinquishes control over those assets. The trustee manages the assets and distributes income to the chosen charity.
  • Trust Term Duration: The charitable lead trust term is established at the time of creation and cannot be modified. If the donor survives the trust term, they will not benefit from the trust.

Key Terms for Charitable Lead Trusts

  • Charitable Beneficiary: The charity or non-profit organization that receives the trust's income or assets for a specified period.
  • Lead Period: The specified time the charitable beneficiary receives income or assets from the trust.
  • Lead Interest: The percentage or fixed amount of the trust's income or assets paid to the charitable beneficiary during the lead period.
  • Non-Charitable Beneficiary: The person or entity that receives the trust's assets or income after the charitable beneficiary's interest has ended.
  • Remainder Interest: The percentage or fixed amount of the trust's income or assets passed on to the non-charitable beneficiary after the lead period ends.
  • Charitable Lead Annuity Trust (CLAT): A type of charitable lead trust in which a fixed amount is paid annually to the charitable beneficiary.

Final Thoughts on Charitable Lead Trusts

Creating a charitable lead trust is a great way to support charitable causes while providing for your heirs. In addition, working with an experienced attorney and a knowledgeable trustee is important to ensure the trust is handled effectively.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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