Leading the Way: Leveraging a Charitable Lead Trust for Greater Impact
Understand how partnering with Seattle Foundation and utilizing a Charitable Lead Trust (CLT) can provide resources to local communities and help donors achieve a variety of personal financial goals.
July 21, 2021
By Bill Zook, senior advisor, gift planning
Many donors are examining their giving practices and looking for ways to support Black, Indigenous, and people of color (BIPOC)-led and -rooted organizations. Our team of philanthropic advisors and program officers are talking with donors about the Fund for Inclusive Recovery, which is intended to provide the stable support BIPOC-led nonprofits will need to move toward resilience, as well as about our recently announced REPAIR commitment to grant a minimum of $25 million to Black-led organizations over the next five years. The charitable lead trust (CLT) is a gift planning vehicle that is often overlooked and is a perfect way to make a five-year commitment to either or both of these efforts.
A CLT facilitates not only significant philanthropy now and in the years to come, but also the eventual transfer of substantial assets to individual beneficiaries. Depending on how it is structured, a CLT also achieves a variety of tax, financial, and estate planning goals.
Each year, a CLT pays Seattle Foundation either a fixed sum (an annuity amount) or a fixed percentage of the trust’s assets as revalued annually (a unitrust amount). The trust remains in existence for a certain number of years or for the lives of one or more family members.
When the trust terminates, one option is for its remaining assets to be returned to the donor, in which case it is referred to as a grantor CLT. Alternatively, the trust’s assets can be distributed to loved ones, in which case it is typically regarded as being a nongrantor CLT. (Technically, it is also possible for a CLT to combine the features of a grantor trust and a nongrantor trust, but this is seldom done.)
Creating a CLT produces a sizeable tax deduction of one type or another. The deduction will be larger:
- the longer the trust lasts,
- the higher its payout rate is,
- the lower prevailing interest rates are, and
- the more payment timing can be optimized.
Thus, it is important to be thoughtful in structuring a CLT.
Similarly, exercising care in selecting and managing the trust’s assets maximizes the likelihood their value will hold up well (and perhaps increase) over time. In short, a CLT not only shrinks the value of assets for tax purposes, but can also largely preserve or even enhance the value of what is distributed when the trust ends.
HONING THE PHILANTHROPIC BENEFIT
A CLT can be a great choice for supporting a specific purpose over a limited period of time. For example, as mentioned above, a person wishing to make a pledge to advance Seattle Foundation’s work through the Fund for Inclusive Recovery or REPAIR effort could establish a CLT to provide annual funding over the course of each initiative’s five-year focus.
A grantor CLT in particular offers a tremendous measure of flexibility that – somewhat surprisingly – is often overlooked. A donor can have meaningful charitable impact before resuming ownership of trust assets while also claiming a sizeable income tax deduction in the year the trust is created (as well as in any applicable carryover years). This is very attractive for those anticipating a spike in income, especially if that income consists largely of cash.
With proper planning, the actual tax owed each year in connection with a grantor CLT can be minimized or even eliminated. Moreover, CLTs structured to pay an annuity are unusually attractive in the current low interest rate environment.
ADVANTAGES OF WORKING WITH SEATTLE FOUNDATION
Depending on the objectives to be accomplished through a CLT, Seattle Foundation can assist in several ways. In appropriate circumstances, the Foundation offers:
- extensive planning expertise that donors and their advisors can access at no cost;
- with an attorney’s permission, free preparation of draft trust wording for their review;
- high quality, reasonably priced trustee services; and
- the unsurpassed flexibility of channeling philanthropy through a true community foundation.
To learn more about various charitable vehicles with Seattle Foundation, please contact Bill Zook, Senior Advisor, Gift Planning, at firstname.lastname@example.org or (206) 388-1722, or Allison Parker, Managing Director, Philanthropy Strategies, at email@example.com or (206) 515-2128.