Charitable Lead Trust
A Charitable Lead Trust (CLT) is an irrevocable split-interest trust under IRC Section 2522 that makes payments to a qualifying charity for a specified term — with the remaining assets (the remainder) passing to the grantor or the grantor's family — providing an upfront charitable deduction while transferring wealth to non-charitable beneficiaries at a reduced transfer tax cost.
The Charitable Lead Trust is the mirror image of the Charitable Remainder Trust (CRT): where a CRT pays income to the donor first and passes remainder to charity, the CLT pays income to charity first and passes remainder to the donor's family. The CLT comes in two primary forms that differ in how the charitable lead interest is calculated and what tax benefits they provide.
A Charitable Lead Annuity Trust (CLAT) pays a fixed dollar annuity to the charity each year. At the end of the trust term, the remaining assets — whatever has accumulated above the annuity obligation — pass to family beneficiaries. The gift or estate tax value of the remainder interest is calculated by subtracting the present value of the charitable annuity stream (discounted at the Section 7520 rate) from the initial trust value. If the trust assets outperform the 7520 rate, the excess passes to beneficiaries free of transfer tax. In a low-rate environment, CLATs are powerful wealth transfer tools because the 7520 discount rate understates expected investment returns, creating a large potential remainder benefit at low gift tax cost.
A Charitable Lead Unitrust (CLUT) pays a fixed percentage of the trust value (as revalued annually) to charity each year. Because the charitable payment fluctuates with trust performance, unitrusts do not create the same arbitrage opportunity against a fixed hurdle rate, but they are more appropriate for charities wanting payments that grow with investment returns.
A non-grantor CLT provides a charity deduction for the present value of the charitable lead interest at inception, taken by the trust itself — effectively sheltering trust income during the charitable period. The grantor does not receive the charitable deduction, but the transfer of assets to the trust is a completed gift (or part of an estate), and the gift/estate tax deduction for the charitable interest reduces the overall transfer tax. A grantor CLT, by contrast, gives the grantor a large upfront income tax charitable deduction, but the grantor must then report all trust income on their own return during the charitable period — a structure that benefits grantors with unusually high income in a particular year.
CLATs are often structured as zeroed-out vehicles: the annuity is calibrated so the present value of the charitable stream equals the entire transfer, making the taxable gift of the remainder essentially zero at the time of trust creation. All subsequent appreciation becomes a tax-free gift to family. The IRS has scrutinized zeroed-out CLATs in ways similar to GRATs, and some estate planners include a small positive remainder value to reduce audit risk.