Is a charitable trust right for me? Part 2: non-grantor charitable lead trusts

Charitable trusts can be a great way to support the causes you’re most passionate about while achieving your own financial goals. This is the second article in a three-part series addressing types of charitable trusts, including charitable remainder unitrusts, non-grantor charitable lead trusts, and flip charitable remainder unitrusts.


There are many ways to support charity while accomplishing other personal financial goals. For philanthropically-inclined taxpayers concerned about taxes imposed when gifts are also made to children and other family members (i.e., gift and estate tax), a charitable lead trust may be a good fit.

With a “non-grantor” charitable lead trust (CLT), a donor makes a gift of cash or other assets to the trust, which then makes payments to a charity or charities each year for a period of time selected by the donor. During the term of the trust, the trust – not the donor – is responsible for income and capital gains taxes on its assets. But because the trust receives a deduction equal to 100% of the amount it distributes to charity each year, a well-managed CLT will often pay very little in taxes. When the trust term ends, assets remaining in the trust are transferred to the donor’s designated heirs – with any applicable gift or estate taxes significantly reduced or eliminated altogether.

BENEFITS TO YOU

This makes CLTs attractive to many donors who anticipate gift and/or estate tax issues. When interest rates are low, as they have been in recent years, the charitable payout rate can be lower, increasing the amount of assets projected to be transferred tax-free to the donor’s heirs when the trust term ends. CLTs are typically established with gifts of $500,000 or more.

Through legislation enacted in late 2017, Congress significantly increased the amount of wealth individuals may transfer to heirs before having to pay federal gift or estate tax. This amount is often called the gift or estate tax “exemption.” For 2020, the exemption is $11.58 million per individual or $23.16 million per couple. This leaves very few estates currently subject to the tax each year.

But this high exemption amount sunsets after 2025 and could change even sooner with shifting politics. For long-term estate planning purposes, CLTs will likely remain a popular planning device for donors seeking to mitigate gift and/or estate tax liability.

BENEFITS TO CHARITY

As with any other gift to Duke University, a CLT can be designated to benefit the school or program of the donor’s choosing. For example, a donor could establish an endowment fund in their family’s name to provide financial aid support for students who would not otherwise be able to attend Duke. This is a wonderful way to ensure that future generations of students will be able to have a great Duke experience.

One donor to Duke Athletics used a CLT to benefit three interests in sequence. First, the CLT provided an annual gift to support the construction of a stadium on campus. Once that goal was reached, the annual gifts were directed toward the renovation of a recreation facility on campus, and then, for the remainder of the trust term, to build a scholarship endowment for women athletes.

Or, a donor could use her CLT to make Annual Fund gifts. The Annual Fund is critical to addressing the most urgent needs of Duke educational programs, research, and community engagement and touches virtually every area on campus.

The articles in this series are a summary of these complex trusts, which can be a powerful part of an estate plan for a family and the charities they hold dear. Please let us know if you have any questions and, as always, we urge you to discuss any giving plan with your personal advisors as well.

TAGS: Charitable lead trust charitable trust Non-grantor charitable lead trust

About the author

Gift Planning

giftplanning@duke.edu

Duke University’s Office of Gift Planning specializes in charitable gift planning for estates, charitable trusts and annuities, and other complex current and future gift plans.

For more information, please contact the Duke University Office of Gift Planning at 919-681-0464 or giftplanning@duke.edu.