I understand you are interested in learning if a charitable lead unitrust (CLUT) would be a suitable instrument for your charitable giving needs.
A CLUT is an irrevocable split-interest trust that provides for a specified amount to be paid to one or more charitable beneficiaries during the term of the trust. The principal remaining in the trust at the end of the term is paid over to, or held in a continuing trust for, a noncharitable beneficiary or beneficiaries identified in the trust. If the terms of a CLUT created on the decedent’s death satisfy the applicable requirements, the value of the CLUT interest is deductible by the decedent’s estate and payments of the unitrust amount to the charitable lead beneficiary are deductible from the gross income of the trust.
A testamentary CLUT is allowed a deduction in determining its taxable income for any amount of gross income paid for appropriate charitable purposes.
There are numerous requirements that must be met and that must be specified in the trust agreement. The operation of the trust is governed by state law. However, the trustee is prohibited from exercising any power or discretion granted under state laws that would be inconsistent with the requirements for the charitable deductions available to a CLUT or for contributions to the CLUT.
A CLUT is irrevocable. However, the trustee has the power to amend the trust from time to time in any manner required for the sole purpose of ensuring that the unitrust interest passing to the charitable organization is a unitrust interest and that payments of the unitrust amount to the charitable organization will be deductible from the gross income of the trust to the extent allowable.
CLUTs are not subject to any minimum or maximum payout requirements. The governing instrument of a CLUT must provide for the payment to a charitable organization, not less often than annually, of a fixed percentage of the net fair market value of the assets of the trust, valued annually. Alternatively, the governing instrument of a CLUT may provide for a unitrust amount that is initially stated as a fixed percentage amount but increases or decreases during the unitrust period, provided that the value of the unitrust interest is ascertainable at the time of the decedent’s death. The unitrust payments may be made in cash or in kind. If the trustee distributes appreciated property in satisfaction of the required unitrust payment, the trust will realize capital gain on the assets distributed to satisfy part or all of the unitrust payment and the trust will be allowed a deduction for the realized capital gains.
A CLUT must have one or more charitable lead beneficiaries. However, the failure to designate a specific charitable beneficiary will not preclude the decedent’s estate from receiving a charitable deduction if the trust instrument provides for the selection by the trustee of a charitable beneficiary.
Finally, a testamentary CLUT is a complex trust that is taxable as a separate entity. The trustee of the trust must apply for a tax identification number for the trust.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.