What is a Charitable Lead Trust?

Charitable lead trusts are a legal mechanism or strategy that makes if possible for organizations or persons to set aside assets that will benefit one or more people or groups. The income that results from any asset placed into the charitable lead trust trust is paid to the person or charity that is named as a recipient in the arrangement. At the same time, the actual ownership of the asset remains in the possession of the trust maker or persons specified as grantors by the trust maker.

A charitable lead trust allows the originator of the trust to specify a specific amount of time that recipients will benefit from any income earned by the asset. During this period, the trust maker often still is responsible for taking care of any applicable taxes due on the generated revenue. These taxes may include estate taxes on property income, capital gains taxes on investment income, and standard federal and state income taxes. However, many examples of the structure for a charitable lead trust allow the grantor to take a charitable donation at the end of the tax year, assuming the recipients are all registered and recognized as charities.

It is also possible to structure the payment to the charity in two different ways. First, the trust maker may choose to designate a percentage of the revenue generated from the asset to go to the charity on recurring basis that is defined in the trust. This approach can be helpful when several charities or recipients are named in the trust, and the desire is to only distribute funds that are actually generated.

The second approach to payouts from a charitable lead trust involve the designation of fixed amounts to each recipient named in the trust. This will mean that the trust maker may need to make up the difference when the assets used in the trust do not generate sufficient income to cover the fixed amounts. At the same time, any revenue generated above the amount needed to honor the fixed payouts may be set aside to cover future shortfalls, or remain in the possession of the trust maker. Typically, the terms of the charitable lead trust will address this issue and specify a procedure to deal with both shortfalls and unanticipated profit from the assets named in the trust.