Charitable lead trusts are an excellent way to give immediate and sustained support to the Vermont Land Trust. Although there are several types of lead trusts, donors are generally seeking to lower their gift and estate taxes while leaving their children and grandchildren a larger inheritance. CLTs enable wealthy individuals, who have large taxable estates, to pass assets to their heirs at reduced tax rates.

What is a charitable lead trust?

A charitable lead trust is an irrevocable trust account, funded with cash, stock, bonds, land, or other marketable assets. The trust makes periodic payments to designated charities. At the end of the trust, the remaining assets are distributed to the designated heirs.

CLTs are established either for a specified term of years or for the lives of one or more individuals. While the trust is in existence, the trustee (the designated trust manager is often a lawyer or financial institution) invests the trust assets and distributes specified annual payments to one or more charities.

NOTE: There are two basic types of charitable lead trusts: those where the assets revert to the donor when the trust ends (grantor lead trust) and those where the assets pass to persons other than the donor when the trust ends (non-grantor lead trust). Because most charitable lead trusts are used to transfer assets to heirs, we will focus just on non-grantor lead trusts.

What are the benefits of a charitable lead trust?

• CLTs are a generous way to support your favorite charities with regular, dependable gifts.
• The donor chooses the time period of the trust. This makes CLTs a strategic way to time the passage of assets to heirs at the time when these assets may make a big difference in their lives, such as a mid-life career change or when their children will be entering college.
• A non-grantor lead trust is a tool for the very wealthy to transfer assets to heirs at a reduced gift and estate tax cost. The assets in the trust are removed from the donor's taxable estate, so that any future appreciation in value will accrue to the heirs rather than to the donor.
• Non-grantor lead trusts have no income tax advantages. If the trust is established during the donor's lifetime, the donor will receive a gift tax deduction. If the trust is established at the donor's death, the donor will receive an estate tax deduction. In both cases, the size of the deduction is determined through a complicated IRS formula that has many variables. An example of how this might work is included on the next page. VLT can make the calculations that would fit your circumstances and goals.

What are the disadvantages?

The primary disadvantage of charitable lead trusts is that the donor and family members will not have access to the trust income nor the principal while the trust is in existence. Therefore, before establishing a charitable lead trust, donors should consider carefully whether their other financial resources are sufficient to meet their future needs.

Can I use real estate to fund a charitable lead trust?

Yes, land can be used to fund a charitable lead trust. However, unless the real estate is income producing, the donor should place sufficient other assets in the trust to ensure that the trustee can make the annual payments to the charity and cover the cost of carrying the property. Otherwise, the land may have to be sold. If the land has conservation value, we recommend that the donor place a conservation easement on the property before it is placed into the trust.

How is the annual payment to the charity determined?

First you would decide which kind of trust to establish:

• In a unitrust, the trust’s assets are valued annually, and the charity receives a fixed percentage of that amount annually. Therefore, in the unitrust, the actual payment to the charity will fluctuate annually depending on the value of the assets in the trust.
• In an annuity trust, the charity receives a fixed annual payout that remains constant regardless of the value of the trust assets.

The choice of either a "unitrust" or "annuity trust" structure will affect the tax benefits for the donor, the annual payment to the charity, and the amount of assets passing to heirs when the trust ends. You would also need to choose the amount that will go to the charity, based upon your goals and calculations under the IRS formula.

How are tax benefits determined?

The tax benefits of a charitable lead trust are a function of many factors, including:

• the value of the donated asset
• the duration of the trust
• the type of trust (grantor or non-grantor; annuity trust or unitrust)
• the charitable payout rate
• the federal discount rate, which is set by the Federal Reserve Board and changes every month.

The Vermont Land Trust can assist you by making the calculations to factor in the many variables. Typically, the longer the trust term and the higher the annual payout rate to charity, the greater the gift or estate tax deduction will be for the donor.

How do I get started?

Your attorney will be your principal advisor and can prepare the charitable lead trust document after discussing your preferences for structuring the trust. To assist you and your attorney, the Vermont Land Trust can prepare the CLT calculations and provide forms for the lead trust document.

Before we can make the calculations, we will need to know the following:

• The term (duration) of the trust;
• The annuity rate to be paid to charity; and
• The estimated fair market value of the asset you intend to use to fund the charitable lead trust. It would also be helpful to know your “cost” or tax basis in that asset.

A key factor in the success of any CLT is the selection of a competent trustee and a savvy investment manager. Because most CLTs last for many years, the performance of the investment portfolio will determine the amount of assets that ultimately pass to your heirs.

If you intend to fund the CLT with land, you must obtain a qualified appraisal of the land's fair market value before the transaction is finalized. There is a 60-day window after the date of the appraisal to complete the transfer of the land to the CLT; otherwise, you will need an appraisal update (usually in the form of a letter).

If your gift is in the form of securities, we will run the final calculations after the transfer so that we can determine the exact value on the day of transfer.

Information contained on this page should not be considered legal, accounting, or other professional advice. Please consult with your financial advisor if you wish to make a planned gift to the Vermont Land Trust.