Charitable Lead Trusts (CLTs)

How a CLT works

1. Trust funding. The grantor irrevocably transfers assets to the CLT.
2. Charitable income stream. The trust pays a specified amount each year to one or more qualified charities for the trust term (often 10-20 years).
3. Family remainder. At the end of the term, the remaining trust assets pass to family beneficiaries -- typically children or grandchildren.
4. Gift-tax computation. The gift-tax value is the present value of the family remainder. Computed using the IRS § 7520 rate, the charitable payout rate, and the term. Higher payouts and longer terms produce smaller remainder values.
5. Zeroed-out CLAT structure. A CLT can sometimes be structured so the charitable annuity value approaches the funding amount, which may produce a zero or near-zero taxable gift value for the family remainder.
6. Outperformance may accrue to family. If the trust assets outperform the § 7520 rate during the term, excess value may pass to family at the end with reduced additional gift-tax cost.

CLAT or CLUT: the payment formula changes who bears investment risk

The IRS describes a charitable lead trust as paying either an annuity interest or a unitrust interest to charity before the noncharitable remainder is distributed. A charitable lead annuity trust1 uses an annuity amount fixed when the trust is created. A charitable lead unitrust uses a stated percentage of trust value recalculated each year.

• CLAT. The required charitable payment does not rise when the portfolio grows or fall when it declines. The noncharitable remainder therefore bears more of the investment result. The asset mix must be able to satisfy the fixed payment schedule even during a down market.
• CLUT. The charitable payment changes with annual valuation. Charity shares more directly in gains and losses, while the trustee accepts recurring valuation work and less predictable annual cash requirements.

The IRS publishes separate model forms for inter vivos CLATs in Revenue Procedure 2007-452 and inter vivos CLUTs in Revenue Procedure 2008-453. Those forms illustrate federal tax requirements; they do not select the right structure for a family or replace New Jersey drafting and administration advice.

Choose the formula only after modeling the proposed assets, term, payout, annual valuation cost, liquidity, charitable recipient, and remainder goal. Calling a CLAT “zeroed out” describes the present-value gift-tax calculation at funding. It does not eliminate investment risk, administration expense, income tax, or the possibility that little or no remainder will reach the family.

Grantor vs. non-grantor CLT

• Grantor CLT (taxable to grantor): The grantor may receive an immediate income-tax deduction under IRC § 1701 for the present value of the charitable lead interest, while remaining taxable on trust income each year. This structure is usually considered only after tax modeling shows why the upfront deduction is worth the later income-tax tradeoff.
• Non-grantor CLT (taxable to trust): The trust is a separate taxpayer and may claim an annual charitable deduction under IRC § 642(c)2 for qualifying charitable payments. This structure is often evaluated when the primary planning driver is gift- or estate-tax treatment rather than an upfront income-tax deduction.

Zeroed-out CLAT structure

The zeroed-out CLAT mirrors the zeroed-out GRAT:

• The annuity to charity is set such that the present value of the annuity stream equals the trust funding amount.
• The remainder to family has zero or near-zero gift-tax value at funding.
• If the trust outperforms the § 7520 rate, excess value may pass to family with reduced additional gift-tax cost.
• If the trust fails to outperform, the family remainder may be small or nonexistent while the charitable payment obligation still runs.
• The structure should be tested against less complex alternatives before it is used.

§ 7520 rate environment

• Low rate environments can make the hurdle easier to clear, but they do not assure a family remainder.
• Higher rate environments may require different assets, payout rates, or terms, and may make simpler strategies more attractive.
• The § 7520 rate at funding is a core modeling input. The trust should not be funded until the numbers have been reviewed with tax counsel or the family's CPA.

Charitable beneficiary selection

Do not treat every charitable vehicle as interchangeable. Before naming a public charity, private foundation, community foundation, or donor-advised-fund sponsor, confirm that the recipient and payment terms satisfy the applicable charitable-interest rules under IRC § 170(f)(2)(B)1, IRC § 2055(e)(2)(B)2, or IRC § 2522(c)(2)(B)3. The tax advisor should also check deduction limits and the private-foundation rules that can apply to split-interest trusts. Family involvement in later grant recommendations does not make a proposed recipient automatically eligible.

Testamentary CLTs

A testamentary CLT is created at the grantor's death under the will or revocable trust. The estate funds the CLT; the charitable annuity runs for the specified term; the family receives the remainder. Testamentary CLTs use the estate-tax charitable deduction under IRC § 20551 rather than the lifetime gift-tax charitable deduction under IRC § 25222.

• A testamentary CLT may fit a grantor who wants flexibility during life but is comfortable committing part of the estate to a charitable lead structure at death.
• The estate-tax charitable deduction can reduce federal estate-tax exposure when the estate is otherwise taxable, but the result depends on the estate size and federal law in effect at death.
• The family remainder still needs careful modeling; it should not be described as automatic or certain.

When a CLT may not fit

• Families without strong charitable intent -- direct family-transfer strategies (SLATs, GRATs, IDGTs) are more efficient.
• Short time horizons -- CLTs need long terms to be worth the structure.
• Assets unlikely to outperform the § 7520 rate -- the family remainder will be small.
• Need for current family income from the assets -- the CLT pays charity, not family, during the term.
• Volatile assets where annual annuity payments may be difficult to fund without forced sales at unfavorable times.

NJ-specific considerations

• New Jersey estate tax is not imposed on estates of resident decedents dying on or after January 1, 2018, under N.J.S.A. 54:38-11. Federal estate-tax exposure may still matter for larger estates.
• New Jersey inheritance-tax classification still matters. Certain transfers are exempt under N.J.S.A. 54:34-42, but beneficiary class and asset path should be reviewed before relying on an exemption.
• New Jersey income-tax treatment should be modeled with the family's CPA. A CLT is legal drafting plus tax design; the trust should not be treated as financial or tax advice from this page.

Next step

How we help: We evaluate whether a CLT belongs in the legal structure, compare it with simpler charitable and family-transfer tools, coordinate the family's CPA or tax advisor, and draft only after the tax model supports the plan. The accepted engagement is bespoke CLT planning, not a charitable-trust template. Describe the charitable term, family remainder, and assets you are considering.