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Denise Schuh

Leverage your philanthropy with today’s low interest rates—using a charitable lead trust.

by Denise Schuh
Director, Donor and Advisor Solutions & Complex Assets

A charitable lead trust (CLT) is a gift of cash or other property to an irrevocable trust. A named charity receives an income stream from the trust for a term of years. Depending on how the trust is structured, the donor enjoys a current income tax, gift tax, or estate tax deduction on the donated assets. After the income stream period ends, the remaining assets are distributed to the non-charitable beneficiaries.

  • The lower the federal interest rate, the higher the income or gift tax deduction. The lower the current IRS 7520 interest rate is, the higher the present value calculation for the stream of payments to the charitable beneficiary. This translates into:
    • A higher income tax deduction for grantor CLTs
    • A lower remainder value subject to gift and estate tax for non-grantor CLTs
  • The donor controls tax benefits through the structure of the trust. There are two types of CLTs, and each affords different tax benefits:
    • A grantor CLT—Most often used for donors experiencing a significant income event. The donor is treated as the owner of the trust for income tax purposes. With this structure, the donor receives a current-year income tax deduction on the income stream passing to charity, but the remainder of the trust assets return to the donor after the trust term ends. The charitable income tax deduction the donor received at the funding of the trust is recaptured over the trust term because the donor is taxed on the CLT income, including the payouts to charity. Tax-exempt investments in the trust help to minimize the donor’s tax liability.
    • A non-grantor CLT—Most often used to reduce the gift and/or estate tax. The lower the remainder value (the gift to the non-charitable beneficiary), the lower the potential gift tax cost. Remainder value can even be zeroed out by adjusting the charitable lead payment amount and duration. If the CLT assets appreciate at a rate that exceeds the 7520 rate, the value of the excess investment return will be distributed to your remainder beneficiaries at the end of the term, free of estate or gift tax.
  • Couple a CLT with a donor-advised fund account. Many donors name their donor-advised fund account as the lead beneficiary. This allows the donor to maintain advisory privileges over the income stream and to better strategize their charitable giving during their lifetime and after their death.

For donors seeking to benefit charitable causes during their lifetime while enjoying gift and estate tax savings, a non-grantor CLT naming a donor-advised fund account as the lead beneficiary may be a great option. Donors should work with a qualified estate planning attorney and tax advisor to confirm that a properly structured CLT will provide the expected results with respect to both the income tax consequences of the gift and the administration of the CLT.

About the author:

Denise serves our most valued investment advisors and affluent clients as a primary point of contact for reviewing and accepting complex asset donations and onboarding large and sophisticated relationships. Prior to joining Schwab Charitable™, Denise served as a senior trust officer, providing estate and trust services for high-net-worth families in Wisconsin. She joined Charles Schwab & Co., Inc. as a High-Net-Worth Trust & Estate/Tax Specialist, a role in which she partnered with Financial Consultants to provide proactive estate, charitable giving, and tax-planning guidance to Schwab’s high-net-worth families. Denise holds a J.D. from Northern Illinois University of Law.