CLT
CLT is an irrevocable trust that pays income to one or more charitable beneficiaries for a term of years, with the remainder going to non-charitable beneficiaries (typically the donor's family). The donor's tax treatment depends on whether the CLT is structured as a grantor or non-grantor trust.
CLTs are roughly the inverse of CRTs — charitable beneficiary receives income for the term, family receives the remainder. CLTs are most commonly used in two specific planning contexts.
First, grantor CLTs for income-tax-rate-arbitrage. The donor receives an immediate tax deduction equal to the present value of the charitable income payments — but the donor is also taxed on the trust's income each year. This is favorable when the donor expects high income in the deduction year and lower income in subsequent years (e.g. a high-income year preceding retirement). The deduction is captured at the high marginal rate; the subsequent income is taxed at a lower rate.
Second, non-grantor CLTs for estate-tax-arbitrage on appreciating assets. The donor contributes assets to the trust; the trust pays charity for the term; the remainder passes to family. If the trust assets appreciate during the term faster than the IRS-prescribed 7520 rate, the appreciation passes to family without estate or gift tax. This was particularly attractive during low-interest-rate periods when the 7520 rate was historically low; less attractive at higher 7520 rates.
| CRT | CLT | |
|---|---|---|
| Income beneficiary | Donor / family | Charity |
| Remainder beneficiary | Charity | Donor / family |
| Primary use | Capital-gains deferral, lifetime income | Estate-tax appreciation transfer |
| §7520 sensitivity | Less | Critical — low §7520 favors |
| Tax-exempt at trust level | Yes | Generally not |
Synthetic UHNW households should include both grantor-CLT (income-tax timing arbitrage) and non-grantor-CLT (estate-tax appreciation transfer) scenarios. The trust ledger tracks: structure (grantor vs non-grantor), term, annual charitable distribution amount, projected remainder, §7520 rate at funding (drives the gift-tax cost calculation).
Common pitfalls
- Confusing grantor and non-grantor CLT income-tax treatment — grantor CLT taxes the donor on trust income; non-grantor CLT taxes the trust.
- Forgetting the §7520 rate as the planning hurdle — high §7520 makes non-grantor CLTs less attractive; low §7520 powers them.
- Treating the charitable distribution as itself deductible to the trust on top of the deduction — double-counting error.
- Letting the term run too long for the donor's age (in grantor CLT cases) — trust income continues to be taxed to the donor for the full term.