A CLT is a split-interest irrevocable trust. Under a CLT, a charitable beneficiary or beneficiaries receive their entire benefit first (the “lead” interests), and then the non- charity beneficiary or beneficiaries receive whatever is left (the “remainder” interests). A CLT can be established as an inter vivos trust (i.e., during lifetime) or at death. The latter is a testamentary CLT or TCLT. CLTs come in two flavors – CLAT and CLUT. The CLAT Under a CLAT, the charitable beneficiary or beneficiaries receive an annuity (an amount determined without regard to the value of the trust assets). Assets cannot be added to a CLAT other than at its initial funding.
Under a CLUT, the charitable beneficiary or beneficiaries receive unitrust payments (a fixed percentage of the trust balance as of the end of the prior year). Assets can be added to a CLUT at any time. Income Tax Planning with CLTs Unlike Charitable Remainder Trusts, CLTs are not tax-exempt trusts. Therefore, some taxpayer has the income tax liability resulting from the CLT’s taxable income. The timing of the deduction for the charitable contributions depends on whether the CLT is a grantor trust for income tax purposes. If a CLAT is a non-grantor trust, the client gets no up-front charitable income tax deduction. Instead, the taxpayer (the trust) gets to take a deduction each year equal to the payment actually made to the charity by the CLT in that year.
Alternatively, by establishing the CLT as a grantor trust for income tax purposes, the client can take an upfront charitable income tax deduction for the present value (determined using the applicable 7520 Rate) of the annuity stream planned to be paid to the charity beneficiary or beneficiaries. However, the downside of making the CLT a grantor trust is that the client must report the CLTs annual trust income on his or her personal income tax return without a deduction for the annual annuity payment to charity. The client, having taken the charitable income tax deduction up front, is not permitted a “second bite at the apple.” Thus back-loading a grantor CLAT has no income tax impact on the donor.