Quick answer: A charitable lead trust (CLT) pays income to a charity first — for a fixed term of years — and then distributes the remaining assets to your heirs. This is the opposite of a charitable remainder trust. The gift/estate tax value of what passes to heirs is dramatically reduced because the IRS only counts what's left after the charitable payments, which can be very little if the trust performs well.
The Mechanics: Charity First, Heirs Second
You fund the CLT with assets — say, $2 million. The trust pays a fixed amount each year to a 501(c)(3) charity of your choice (or your family foundation) for a set term, such as 20 years. At the end of the term, whatever remains in the trust passes to your named heirs. The taxable gift to heirs at the time of funding is calculated as the total contributed minus the present value of the charitable payments — potentially resulting in little or no taxable transfer to the next generation.
If the trust investments outperform the IRS's assumed rate of return (the "Section 7520 rate"), the excess passes to heirs at no cost of gift and estate tax.
Grantor vs. Non-Grantor CLT
- Grantor CLT — you receive an upfront income tax deduction for the full present value of the charitable payments, but you pay income tax on the trust's earnings each year. Works best for high-income years.
- Non-grantor CLT — no upfront income deduction for you, but the trust pays its own taxes. More commonly used for estate planning when the goal is maximizing wealth transfer to heirs.
Who Benefits Most from a CLT
Charitable lead trusts are most effective for families with taxable estates, charitable intent, and assets likely to appreciate significantly during the trust term. They're complex instruments requiring a qualified estate attorney and a trustee who can manage investments over a multi-year period. They are not a good fit if you need access to the transferred assets during the trust term — once in, the assets are committed to charity first. Consult an estate planning attorney and CPA before proceeding.
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Kyle Ellison is a licensed financial professional in TX, CA, NV, MT, UT, NM helping families protect and pass on what they've built.