Working and accumulating wealth to pass on to another generation is the dream of every American. Of course, the idea is to pass along as much as possible, which is where estate planning comes into play. One technique that is frequently overlooked when making estate plans, which could help you accomplish your goal, is the Charitable Lead Trust (CLT).

In this kind of trust, the initial or lead interest benefits the charity.A donor can transfer assets to a CLT, which then distributes income from those assets to the recipient charity for a specified term. The length of the term can either be a set number of years or for the life of the donor. At the end of the trust term, the trust distributes the assets to previously designated non-charitable beneficiaries; usually a spouse, children or grandchildren.It is also possible to have the assets revert to the charity once the trust has terminated. By establishing a charitable lead trust, the donor is, in effect, lending the assets to the charity for the term of the trust.

Any assets that have the potential to appreciate substantially over the term of the trust are normally the best candidates. The most commonly used assets to fund a CLT are stocks, bonds and income-producing property, such as commercial real estate.

There are two methods by which this type of trust can make the distributions. The first is through a unitrust. The unitrust makes an annual valuation of the trust's assets and pays the recipient charity a fixed percentage of that amount. The second method is through an annuity trust. An annuity trust pays the charity a fixed annual amount, based on the initial value of the assets, regardless of whether the trust's annual asset value rises or falls.

Most charitable lead trusts are designed to have the trust’s assets given to beneficiaries other than the original donor once the term of the trust has expired. This may be known as a non-grantor lead trust, a trust in which the principal reverts back to the donor upon completion of the term is referred to as a grantor lead trust.

There are specific tax advantages associated with both a grantor and non-grantor lead trust. If you establish a non-grantor lead trust while living, you can take a gift tax deduction for the present value of the income interest paid to the charity. Gift tax would only be owed on the present value of the remainder interest as calculated at the time of your gift.If the trust is established upon your death, your estate can take the present value of the income interest paid to the charity as an estate tax deduction.

If you establish a grantor trust, you can take an income tax deduction for the present value of the income interest paid to the charity. However, you will owe income tax on all taxable income generated by the trust, including payments made to the charity, and additional charitable deductions for the trust’s annual charitable distributions are not allowed.

A lead trust is a good way to kill two birds with one stone: you can fulfill your philanthropic desires through a charitable donation, and transfer assets at a favorable tax advantage to your heirs at a future date. Capital appreciation in the assets transferred to the lead trust is not subject to further gift or estate tax at the time of distribution to your heirs.

Be sure to seek the advice of a qualified legal and/or tax professional before moving forward with any estate planning strategy.

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