If you have a philanthropic heart and
have not yet considered a charitable
lead trust (CLT), now is an ideal time to review this strategy for giving either
during your lifetime or upon your death
through your will.
“A CLT is a very attractive option during the current low interest rate environment, enabling you to either take a sizeable income tax deduction now and/or
reduce the size of your estate,” says
Gregg R. Fortune, CFP®, CFS, AEP, managing member of Prosperitas Financial
Advisors, LLC, Bloomfield Hills.
Smart Business asked Fortune for
more information about this beneficial
option for those seeking a creative way
to give.
What types of charitable trusts are there?
There are two types: the charitable
remainder trust (CRT) and the charitable lead trust (CLT). The CRT is more
familiar, but the CLT offers many attractive benefits worth considering. A CLT
lets you donate the income stream from
an asset to a charity for a set number of
years. You determine who gets what
assets when and at what percentage.
The remaining appreciation goes to the
person who established the CLT or his or
her family members.
Are there variables of CLTs?
Yes. There is a charitable lead unit
trust (CLUT) and a charitable lead annuity trust (CLAT). A CLUT gets valued
once a year and the proceeds are ‘sprinkled’ at the set percentage. Say you have
a property worth $2 million. You sell it
for cash. You specify the charity’s payout rate as 5 percent (so the charity gets
$100,000). You invest the rest of the
money in whatever you choose (securities, bonds, etc.). Every year, the charity
gets 5 percent based on the investments’
performance, so the amount will vary
every year.
With a CLAT, the valuation is done once, at the beginning. If you specify
that 5 percent will go to the charity
every year, the same amount goes to
charity regardless of performance.
Are there different ways to set up the CLT?
There are two ways: grantor and non-grantor. You can set up a CLAT or a
CLUT using either of the two. A grantor
lead trust gives you a much larger tax
deduction. The deduction is calculated
based on the income stream going to the
charity and is based on IRS tax tables
that are tied to interest rates. Because
we are in a low interest rate environment, the tax deduction is very high
right now.
With a nongrantor lead trust, there is
no income tax deduction currently, but
it does allow you to reduce the size of
your estate. With this method, you can
specify that the charity receive income
for a set number of years, at which
point the asset will transfer to a family
member(s).
Provide some specific examples of how a
CLT works.
Say you purchased a lot on a lake many
years ago. You built a summer house on
the lot, which you rent out. Your grandchildren are in their late teens. You establish a CLT, which allows you to donate
the stream of income coming in from the
rental for 10 years. After that, the property will then go to your grandchildren,
who by then will be old enough to manage it wisely. In this example, the CLT
serves as a nice delay trigger to keep the
asset in the family and also enables you
to achieve some tax benefits.
Here’s another example: Say you own a
growing business that is currently worth
$20 million. Your shares are about $15
million. Your children are in their early
20s and are just beginning to work in the
business. You can donate your ownership interest and distribute the income
to charity for 10 or maybe 20 years, at
which point it will transfer to your children who by then will be mature enough
to take over the business. Estatewise,
you’ve ‘frozen the value.’ If the business
grows to $70 million during that time,
your estate will not have to pay the tax
on that growth when the children inherit the business.
How flexible are CLTs?
As we discussed, CLTs are very flexible
upfront. However, once established, they
are irrevocable. You can get very creative
with a CLT. You can select one or more
charities, pool a grouping, or even create
your own foundation. You can even give
jobs to your family members, working
for a foundation that you create. Finally,
while various types of property can be
used to fund a CLT, consideration must
be given to avoid UBTI (unrelated business taxable income) to maximize the
charitable contribution.
GREGG R. FORTUNE, CFP®, CFS, AEP, is a managing member of Prosperitas Financial Advisors, LLC, Bloomfield Hills. Reach him
at (877) 540-5777 or [email protected].