Who pays income tax on a charitable lead trust?

The grantor lead trust under federal guidance

For a grantor charitable lead annuity trust, the donor claims the income tax charitable deduction when assets are irrevocably transferred. The donor is taxed on the trust's income during the annuity period and receives no deduction for later annuity payments.

The lead interest is for the charity's use, so the individual's income tax charitable deduction is generally limited under section 170(b)(1)(B) to 30 percent of the taxpayer's contribution base.

Grantor and non-grantor forms differ

Practitioners describe grantor and non-grantor charitable lead trusts as differing in who pays income tax and in how charitable deductions may be claimed.

Practitioners note that a charitable lead trust must be a grantor trust for the donor to claim an income tax deduction when it is created.

Recapture

Practitioners describe a recapture rule for the grantor form. A donor may need to recapture charitable deduction amounts as income if the donor stops being the trust's taxable owner before the term ends.

A grantor who dies during the term is described as recapturing the creation-year income tax charitable deduction on the final income tax return.