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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.
How to Create a Charitable Lead Trust
Establishing a charitable lead trust involves the following steps:
- 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.
- Select the Charitable Organization. The next step is to choose a reputable charitable organization that aligns with your values to receive the yearly payments.
- 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.
- 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.
- 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.
- Choose a Trustee. A trustee who is well-versed in trust management and can effectively manage assets should be appointed.
- File the Necessary Documents. The trust must be registered with the IRS, and the trustee must file annual tax returns for the trust.
- 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.
- 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.
- 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
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.
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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Meet some of our Charitable Lead Trust Lawyers
August 4, 2020
I focus my practice on startups and small to mid-size businesses, because they have unique needs that mid-size and large law firms aren't well-equipped to service. In addition to practicing law, I have started and run other businesses, and have an MBA in marketing from Indiana University. I combine my business experience with my legal expertise, to provide practical advice to my clients. I am licensed in Ohio and California, and I leverage the latest in technology to provide top quality legal services to a nationwide client-base. This enables me to serve my clients in a cost-effective manner that doesn't skimp on personal service.
August 16, 2020
Davis founded DLO in 2010 after nearly a decade of practicing in the corporate department of a larger law firm. Armed with this experience and knowledge of legal solutions used by large entities, Davis set out to bring the same level of service to smaller organizations and individuals. The mission was three-fold: provide top-notch legal work, charge fair prices for it, and never stop evolving to meet the changing needs of clients. Ten years and more than 1000 clients later, Davis is proud of the assistance DLO provides for companies large and small, and the expanding service they now offer for individuals and families.
August 5, 2020
I am a 1984 graduate of the Benjamin N Cardozo School of Law (Yeshiva University) and have been licensed in New Jersey for over 35 years. I have extensive experience in negotiating real estate, business contracts, and loan agreements. Depending on your needs I can work remotely or face-to-face. I offer prompt and courteous service and can tailor a contract and process to meet your needs.
August 12, 2020
Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
August 13, 2020
For over thirty (30) years, Mr. Langley has developed a diverse general business and commercial litigation practice advising clients on day-to-day business and legal matters, as well as handling lawsuits and arbitrations across Texas and in various other states across the country. Mr. Langley has handled commercial matters including employment law, commercial collections, real estate matters, energy litigation, construction, general litigation, arbitrations, defamation actions, misappropriation of trade secrets, usury, consumer credit, commercial credit, lender liability, accounting malpractice, legal malpractice, and appellate practice in state and federal courts. (Online bio at www.curtmlangley.com).
August 13, 2020
Real Estate and Business lawyer.
August 18, 2020
Braden Perry is a corporate governance, regulatory and government investigations attorney with Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal defense and government compliance, investigations, and litigation attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer/Chief Regulatory Attorney of a global financial institution. Mr. Perry has extensive experience advising clients in federal inquiries and investigations, particularly in enforcement matters involving technological issues. He couples his technical knowledge and experience defending clients in front of federal agencies with a broad-based understanding of compliance from an institutional and regulatory perspective.