Charitable Lead Trusts, Explained
Are you looking for a way to fund the causes you love and strengthen your family’s long-term plan? If you’re a high-net-worth individual, you may know about cash gifts and donor-advised funds—but a lesser-used tool can advance both goals at once: the charitable lead trust (CLT).
This guide covers how CLTs work, the differences between grantor and non-grantor designs, why interest rates and asset choice matter, and how FMD Wealth Advisors can help integrate a CLT into your broader plan.
What is a Charitable Lead Trust?
A CLT splits benefits over time. For a set term, a charity receives payments (either a fixed annuity or a set percentage of the trust’s value). When that term ends, whatever remains goes to noncharitable beneficiaries—often family.
Two common formats
Charitable Lead Annuity Trust (CLAT): The charity receives the same dollar amount each year, regardless of performance.
Charitable Lead Unitrust (CLUT): The charity receives a fixed percentage of trust assets each year, so payments rise or fall with market value.
In either case, the charity gets “the lead” stream first; your heirs receive the remainder at the end.
Why consider a CLT?
Purposeful giving: Provide multi-year support that organizations can plan around.
Potential tax efficiency: Depending on structure, there may be significant income- or estate-tax advantages.
Wealth transfer: If structured well, remainder assets can reach heirs at a reduced—sometimes near-zero—transfer-tax cost based on how the trust is valued.
Grantor vs. non-grantor CLTs
Grantor CLT
How it works: You (the grantor) are treated as the owner for income-tax purposes.
Primary advantage: An upfront income-tax deduction equal to the present value of the charity’s lead interest.
Ongoing tradeoff: You pay the trust’s annual income tax even though the earnings fund the charitable payouts.
Recapture risk: If you die before the term ends, part of the initial deduction can be added back to your final income (reducing some of the early benefit).
This approach can fit when you have unusually high taxable income in the year you set up the trust and expect lower brackets later.
Non-grantor CLT
How it works: The trust is its own taxpayer. You do not claim the upfront charitable deduction.
Primary advantage: The trust generally claims a charitable deduction for payments it makes, potentially leaving little taxable income in the trust.
Wealth-transfer benefit: Assets are typically removed from your estate, which can reduce future estate taxes.
Non-grantor designs often suit donors who don’t need a personal income-tax deduction but want trust income shielded from their individual return and prefer estate-tax efficiency.
Why low interest rates can help
CLT math uses the IRS Section 7520 “hurdle rate.” When that rate is low, it’s easier for the trust’s investments to outpace the assumption used to value the remainder. Growth above the hurdle can pass to your beneficiaries with minimal additional gift or estate tax.
A quick example
You contribute $10 million to a 10-year CLAT that pays $1 million per year to charity. If the assumed interest rate is 1%, the present value of those charitable payments is high—lowering the taxable value of what family ultimately receives. If portfolio returns exceed 1%, the “extra” growth can accrue to heirs with little or no additional transfer tax.
Funding a CLT: choosing assets wisely
High appreciation potential: Assets you expect to grow meaningfully (e.g., certain equities or real estate) can amplify remainder value.
Reliable cash flow (especially for CLATs): Fixed annuity payments require liquidity. If the trust must distribute assets in-kind to meet payouts, that can trigger capital gains inside the trust.
Positioning rebounding or growth-oriented assets can enhance both the charitable impact and the wealth-transfer result.
Designing payments to avoid early depletion
Because a CLAT’s payout is fixed, weak early returns can strain the trust. One solution is graduated payments—smaller amounts at the start that increase over time, giving assets more runway to grow.
Testamentary CLTs (at death)
A CLT can begin under your will or revocable trust. If your estate exceeds the federal exemption, steering the excess into a testamentary CLT can produce a dollar-for-dollar estate-tax charitable deduction on the lead interest. After the term, your heirs receive the remainder. This approach can be attractive for larger estates seeking to blend philanthropy with tax-efficient transfers.
How FMD Wealth Advisors supports CLT planning
CLTs sit at the intersection of charitable intent, investment design, and tax law. FMD Wealth Advisors helps high-net-worth families evaluate grantor vs. non-grantor tradeoffs, align payout design with market realities, choose appropriate funding assets, and coordinate with your attorney and CPA so the trust fits your overall plan.
Disclosures: FMD Wealth Advisors LLC (“FMD Wealth Advisors”) is a Registered Investment Adviser.
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