What is a Charitable Lead Trust?
A charitable lead trust (CLT) is designed to reduce the cost in taxes of transferring assets to the next generation while providing a gift for Himalayan Institute now. A CLT minimizes the taxes your beneficiaries pay by first donating a portion of the trust’s overall return to Himalayan Institute and then, after a specified period of time, transferring the remainder of the trust to your beneficiaries.
Specifically, a charitable lead trust works as:
- Assets are contributed irrevocably to a trust
- You choose the term of the trust and other specifications
- The trust makes regular payments to Himalayan Institute
- When the trust term ends, the remaining assets, including any appreciation of the assets, is paid to your designated heirs.
- The taxable value of the gift to your heirs is offset by a deduction for the pres¬ent value of the payments that will be made to Himalayan Institute
Why Might a Charitable Lead Trust Be Appropriate for Me?
A charitable lead trust may be appropriate for you if you are interested in:
- Reducing your gift and estate taxes
- Reducing or eliminating transfer taxes when passing the trust assets to your heirs, depending on how your charitable lead trust was structured
- Providing Himalayan Institute with resources needed for immediate needs
What Are the Advantages of a Charitable Lead Trust?
The advantages of a charitable lead trust may accrue to both the donor and the donor’s heirs. Some of the advantages of a CLT to the donor include:
- The present value of the payments provided to Himalayan Institute reduces your gift and estate taxes
- Income earned from trust assets is not included in your individual taxable income
- The amount and term of the payments to Himalayan Institute can be set so as to reduce or even eliminate the transfer taxes due when the principal passes to your heirs
- Your family benefits from Himalayan Institute’s money management without a fee
Further, your heirs may enjoy tax advantages:
- The taxable value of the gift to your heirs is reduced or discounted because they will not actually receive it until some time in the future
- All appreciation that takes place in the trust, after the payments to Himalayan Institute are made, goes gift and estate tax-free to your heirs. (Generation-skipping taxes may apply in some situations; however, they may be minimized through careful planning.)
Example of a Charitable Lead Trust
Mr. and Mrs. Dharma place $3 million of closely held stock in a non-grantor Charitable Lead Annuity Trust. The trust will pay 7% of the contribution, or $210,000 an¬nually to Himalayan Institute. The Dharmas’ two children will receive the lead trust assets in 20 years.
As a result, the children receive over $4.3 million from the Lead Trust (8% annual investment return assumed). The gift tax deduction is $3 million. The taxable gift to children is $0 (zero), which preserves their lifetime gift for exclusion. Over the course of the trust term (20 years), Himalayan Institute will receive $4.2 million as a result of the Dharmas’ lead trust.
Adapted from Penn State University’s Fact Sheet on Charitable Lead Trusts
As with any decision involving your assets, we urge you to seek the advice of professional counsel when considering a gift to the Himalayan Institute.