Protecting Your Heirs’ Inheritance:The Charitable Lead Trust (CLT)

Source: From "AARP Crash Course in Estate Planning"  | 2005

A charitable lead trust is essentially the reverse of a charitable remainder trust. Rather than the donor receiving lifetime income from the trust, the charity gets the "lead" benefit and receives the annual stream of income payments. When the donor dies (or at the end of a predetermined number of years), these payments to the nonprofit organization end, with the remaining trust principal going to someone of the donor’s choosing (or to the donor himself, if he’s still alive).

This tool can be attractive to an older person with a large estate who is looking to transfer his wealth while saving federal estate tax. For example, consider a charitable lead trust set up to go into effect at the donor’s death and last for a term of ten years. Upon the donor’s death, his estate can take a tax deduction for the present value of the annual payments the charity will receive over the next ten years. After the ten-year term, the trust principal goes to the donor’s children or grandchildren (or anyone else). Although the children or grandchildren receive this bequest—on paper—when the donor dies, its value is greatly diminished from the original sum placed in the CLT—meaning the donor’s estate is hit with less estate and generation-skipping transfer taxes. This is because the donor’s loved ones must wait years before actually seeing the money (a dollar paid in the future is not worth as much as a dollar paid today).

From "AARP Crash Course in Estate Planning," by Michael T. Palermo, JD, CFP, 2005, p. 196.