Charitable lead trust

How it works

A charitable lead trust pays charity first and transfers the remaining interest to a noncharitable beneficiary afterward. The charitable interest can last for a term of years or a named person's lifetime.

A charitable lead annuity trust, or CLAT, pays an annuity amount that does not fluctuate with trust corpus value or income. A charitable lead unitrust, or CLUT, pays a fixed percentage of annually determined asset fair market value, so its payments fluctuate.

The remainder's gift-tax value depends on the section 7520 rate, payout rate and term. Practitioners describe the remainder interest in a CLAT as reduced by the charity's interest.

Where it shows up for owners of businesses, real estate and private investments

The payout format matters to the payment pattern. A CLAT's annuity amount does not fluctuate with corpus value or income, while a CLUT's payment changes with the annually determined fair market value of trust assets.

Points that are easy to confuse

A charitable lead trust and a charitable remainder trust place the charitable and noncharitable interests in opposite order. In a lead trust, charity receives the interest first and the noncharitable beneficiary receives the remainder afterward.

The CLAT uses an annuity amount that does not fluctuate with corpus value or income.

Common questions