Selecting the right legal instrument for a charitable donation can help ensure that your good deed goes unpunished.
One effective but lesser-known instrument for charitable donations is the charitable lead trust (CLT). Donors can set up this type of trust in Houston to provide a stream of income to a particular charity for a pre-specified term, after which the property will revert to selected members of the donor’s family.
Charitable Giving Options
CLTs are irrevocable, meaning that they cannot be modified or canceled once they have been set up. For this reason, it is important to consult a knowledgeable trust and estate lawyer before executing a CLT.
The CLT offers donors substantial tax savings in a flexible format. For example, donors have the luxury to set up an exact duration for the trust, to choose whether to structure payments as fixed annuity payments or as a trust percentage, and whom to designate as the beneficiaries at the expiration of the trust term. In addition, the trust may contain a wide variety of assets, such as real property, publicly traded securities, business interests, and private company stock.
A CLT may be set up either as a grantor or a non-grantor trust. This distinction has important implications for tax deductions.
The grantor CLT allows donors to take advantage of a current deduction for the present value of future payments to the beneficiary, subject to deduction limits. The investment income generated by the trust, however, will be taxable to the grantor for the duration of the term.
Unlike the grantor CLT, the non-grantor trust treats the trust itself as the owner of the assets. This arrangement means that the trust rather than the donor is responsible for any taxes due on undistributed income from the trust. Therefore, only the trust can claim a charitable deduction for distributions to the charitable beneficiary.
In general, donors may benefit from selecting a non-grantor trust setup because the income tax liability resulting from a grantor trust arrangement tends to overshadow the benefit of a current deduction.
Charitable Lead Trusts vs. Charitable Remainder Trusts
Trust and estate attorneys regularly counsel clients on these types of issues to ensure that charitable donors can still meet their financial goals when giving back.
CLTs have several advantages over charitable remainder trusts (CRT), a more commonly used trust form. Like CLTs, CRTs provide an income stream to the charitable beneficiaries of the trust for a specified term. At the end of that term, however, the remaining assets in a CRT go to the designated charity rather than reverting back to the donor’s family. Furthermore, CRTs also lack some of the flexibility of CLTs. For example, unlike CLTs, CRTs must impose yearly maximum or minimum requirements.
Call a Houston Trust Lawyer for Prompt Assistance
The trusts and estates team at McCulloch & Miller, PLLC is committed to helping clients select the right type of charitable instrument for their unique situation. Our Houston estate planning attorneys are skilled at identifying particular needs and circumstances that affect the choice between a CLT, a CRT, or another type of trust instrument. With decades of experience in trusts and estates planning, you can trust us to guide you through every step of the process. Contact us at 713-333-8900 to schedule a consultation with an attorney on our team today.