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Trust Law/Level V · Tax and legacy/5.3 Generations and charity/Lesson 6

Charitable lead trusts

How a US charitable lead trust pays charity first for a term and then passes the remainder to family or others, and how grantor and non-grantor versions are taxed.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. For donors under the 2026 basic exclusion of $15,000,000, direct gifts or a donor-advised fund reach the same charities more cheaply than a CLT; the CLT’s transfer-tax benefit matters only where estate or gift tax would otherwise be due.
  2. A non-grantor CLAT moves growth above the §7520 rate to family with little taxable gift, since only the remainder’s value is taxed (§2522); charitable transfers may use the current or either prior month’s rate, 5.2% to 5.6% for October 2026, so pick the lowest.
  3. A grantor CLT suits a year of unusually high income: the donor deducts the present value of charity’s payments up front, then pays tax on all trust income for the term, and part of the deduction is recaptured if grantor status ends early (§170(f)(2)(B)).
  4. Funding a grantor CLT with tax-exempt municipal bonds reduces the trust income the donor must report; the charity’s payment must still be a guaranteed annuity or fixed unitrust percentage, and the trust files Form 5227 each year.

MaterialsThe IRS page listing the current §7520 interest ratesThe text of IRC §170(f)(2)(B) and §2522, free on law.cornell.eduLesson 5.3.5, on charitable remainder trusts, and lesson 5.1.5, on grantor trusts

Wonder

  1. What happens to the family’s share if the trust’s investments do worse than the §7520 rate?
  2. Who pays income tax on the trust’s earnings during the charitable term?
  3. Why does the §7520 rate change the value of the charity’s share?

Explore

  1. A charitable lead trust (CLT) reverses a charitable remainder trust (lesson 5.3.5). Charity receives payments first, for a term of years or for someone’s life, and when the term ends the remaining property passes to non-charitable beneficiaries, often the donor’s children or grandchildren, or back to the donor. Unlike a CRT, a CLT is not governed by IRC §664, is not exempt from income tax, and has no 5% minimum payout or 10% remainder test.
  2. For any tax deduction to be allowed for the charity’s interest, the payment must be a guaranteed annuity or a fixed percentage of the trust’s value, revalued each year (IRC §§170(f)(2)(B) and 2522(c)(2)(B)). A charitable lead annuity trust (CLAT) pays a fixed amount, so investment results above or below expectations fall on the remainder beneficiaries. A charitable lead unitrust (CLUT) pays a fixed percentage of the yearly value, so charity’s payments rise and fall with the assets. The IRS has published sample CLAT forms in Rev. Proc. 2007-45.
  3. In a grantor CLT, the donor is treated as owner of the trust for income tax under the grantor trust rules (IRC §§671-679). The donor gets an income-tax deduction up front for the present value of the charity’s payments, but is then taxed on all the trust’s income during the term, with no further deduction as payments go to charity. If the donor stops being treated as owner, for example at death during the term, part of the deduction is recaptured as income (IRC §170(f)(2)(B)).
  4. In a non-grantor CLT, the trust is a separate taxpayer. The donor gets no income-tax deduction, but the trust can deduct the income it pays to charity each year (IRC §642(c)). The main effect is on gift or estate tax: the present value of the charity’s payments is deductible (IRC §2522 for gifts, §2055 at death), and only the value of the remainder counts as a taxable gift or bequest.
  5. These values are worked out with the §7520 rate, which equals 120% of the federal midterm rate, rounded to the nearest 0.2%, and is published monthly by the IRS. A lower rate gives the charity’s stream of payments a higher present value, so the deduction is larger and the taxable value of the remainder is smaller. If the trust’s investments earn more than the §7520 rate, the excess passes to the remainder beneficiaries free of further gift or estate tax; if they earn less, the remainder can be small or nothing.
  6. A CLT files Form 5227 each year, and its trustee owes the usual fiduciary duties under state law, including prudent investment. Because the charity must be paid first and the trust is irrevocable, the donor and family give up use of the property during the term. This lesson describes how CLTs work under US federal law; it does not suggest using one or choosing a particular form.

Key facts

  • A charitable lead trust pays charity for a term, then passes the remainder to non-charitable beneficiaries such as family.
  • The charity’s interest must be a guaranteed annuity (CLAT) or a fixed percentage of yearly value (CLUT) to be deductible (IRC §170(f)(2)(B), §2522).
  • In a grantor CLT, the donor takes an up-front income-tax deduction but is taxed on the trust’s income for the whole term.
  • In a non-grantor CLT, the donor gets no income-tax deduction; the trust deducts amounts paid to charity (IRC §642(c)).
  • A lower §7520 rate raises the present value of the charity’s payments and lowers the taxable value of the remainder.
  • Unlike a CRT, a CLT is not tax-exempt and has no §664 payout limits or 10% remainder test.

Exercise nine, six, three, one

9CollectList up to 9 features of a charitable lead trust you are reading about (some will have fewer), such as its type, term, annual payment, charity, remainder beneficiaries, assets, grantor status and the §7520 rate used.
6ClusterSort them into 6 categories: trust type, charity payments, remainder beneficiaries, assets, income tax treatment, and valuation figures.
3DistillReduce the 6 categories to 3 groups: features that affect income tax, features that affect gift or estate tax, and features you would ask a tax adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why a lower §7520 rate reduces the taxable value of a CLT’s remainder.

Fact check

Dates, figures and claims checked against the published sources listed below.

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