Planned Giving Option: Charitable Lead Trust

planned-giving-CLTA charitable lead trust is a dependable vehicle for making a meaningful charitable gift, passing family wealth to heirs and sheltering potential growth from taxes.


How it Works

A charitable lead trust (CLT) pays income to YBBBS for a specific period of time, with the trust assets reverting to the owner or his/her family. If the assets are to be returned to you, you receive an income tax deduction when the trust is created. If the assets are passed on to heirs, estate or gift taxes on the value of the gift are reduced or eliminated.

Some charitable lead trusts are created solely for income-tax purposes. Most often, though, these trusts are designed to exclude assets-and subsequent appreciation on those assets-from a donor’s taxable estate while ensuring the donor’s favorite causes receive significant charitable support.

Typically, assets transferred to a CLT will be excluded from the donor’s estate. This makes CLTs good vehicles for transferring assets that are expected to increase substantially in value after the trust is created-provided the trust will not need to liquidate the assets to meet its obligations to the charity.

If you are interested in creating a CLT, but do not have a relationship with a bank or trust company, who would serve as trustee, the Arizona Community Foundation has agreed to Trustee any CLT for the benefit of Yavapai Big Brothers Big Sisters.


Why now is the Time For a Charitable Lead Trust

Asset values are low. Because the gift and estate tax is assessed based on the value of assets being transferred, the tax falls when values are low. Consequently, transferring assets when values are low or using strategies  which freeze the value are highly advantageous.

Rates are low. Many estate planning strategies, including use of a CLT, hinge on calculations which are dependent upon a government published interest rate called the Applicable Federal Rate. The AFR, released monthly, has recently been at rock bottom. When this rate is low, the CLT becomes extremely attractive.

Appreciation potential over the next several years is excellent. Since many assets are severely depressed right now, they are likely to appreciate by a margin well above the current 1.2 percent AFR in the coming years.


The Ideal Donor for a Charitable Lead Trust

Charitable lead trusts are suitable for donors who:

  • • Do not need current income
  • • Can afford to set aside a portion of their assets for a certain number of years
  • • Want to make annual gifts to a charitable entity such as Yavapai Big Brothers Big Sisters
  • • Want to ensure their heirs receive an inheritance – but not immediately
  • • Want to reduce estate taxes
  • • Own securities, real estate or other assets that they expect to increase in value over the term of the trust

Important Considerations:

  • • The recommended minimum for a charitable lead trust is $500,000
  • • Charitable lead trusts work best with low-basis assets because increases in value after the trust is created will not be included in the donor’s estate.
  • • They are irrevocable—that is, the trust cannot be changed or revoked if the  estate tax law changes or the grantor needs funds.


Two Types of Charitable Lead Trusts

There are two types of Charitable Lead Trust formats from which a donor may choose:

A Charitable Lead Annuity Trust pays a fixed annuity amount to charity for a term of years or for the life of one or more individuals, with the remainder passing to the donor’s beneficiaries.  This is the more commonly utilized form of lead trust.

A Charitable Lead Unitrust is a trust from which a fixed percentage of the net fair market value of its assets, valued annually (typically on Jan.1), is paid annually to charity for a term of years or the life of one or more individuals.

Yavapai Big Brothers Big Sisters Foundation Can Help You Envision The Possibilities.  Working with you and/or your professional advisor, our staff can illustrate various scenarios using planned giving software to visually explain how a CLT might serve you, your heirs and your favorite causes.


As an example:
Bill Gunnels is a third-generation Arizona farmer who owns land worth $1 million.  He is interested in knowing how he might leverage this asset to seed a charitable gift to YBBBS, shelter the appreciation from taxes and preserve some wealth for his children.  The following illustration for Bill assumes the land will appreciate by about 6 percent and that the trust will pay 7 percent to YBBBS.

If Bill places the land in a Charitable Lead Trust, he may take a tax deduction of $628,782.  If the trust pays a fixed 7 percent to YBBBS for 10 years, for a total of $700,000, at the end of the term Bill’s heirs would receive $868,192.  Meanwhile, Bill has provided YBBBS with a substantial income stream for 10 years to support their program.  If Bill retains the property to pass to his heirs directly, assuming appreciation of 6 percent, the land would grow to a value of $1,386,258 after 10 years.  This would require Bill’s heirs to pay $623,816 in estate taxes and ultimately receive an inheritance of $762,442, with no gifts made to charity.

*This educational illustration is not professional tax or legal advice; consult a tax advisor about your specific situation.     


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