A Charitable Lead Trust (CLT) is a type of trust that provides a stream of income to a charity for a specified period of time, after which the remaining assets transfer to non-charitable beneficiaries, such as the grantor’s heirs. CLTs can be used in a 1031 exchange, which is a tax-deferred exchange under section 1031 of the US Internal Revenue Code, to defer capital gains tax.
- A Charitable Lead Trust (CLT) provides a stream of income to a charity for a specified period of time, with the remaining assets transferred to non-charitable beneficiaries.
- CLTs can be used in a 1031 exchange to defer capital gains tax.
- CLTs offer a way to support a charity and reduce the tax burden on the grantor’s heirs.
John is an investor who owns a rental property worth $1 million that he wants to sell. He is concerned about the capital gains tax he would have to pay on the sale. Instead, he decides to transfer the property to a Charitable Lead Trust, which would provide an annual income to a charity for a period of 10 years. After ten years, the remaining assets would transfer to John’s children.
- Consult with a tax advisor or attorney to ensure that a CLT is a right choice for your specific situation and to understand the tax implications.
- Consider the charitable recipient carefully, as it must be a qualified 501(c)(3) organization.
- Consider the charitable lead’s duration and the trust’s size, as both will impact the tax benefits and the eventual distribution to the non-charitable beneficiaries.
- Consider a Charitable Lead Trust as part of a comprehensive estate plan to maximize the tax benefits and support your chosen charity.
- When using a CLT in a 1031 exchange, ensure that all the requirements for a tax-deferred exchange are met to avoid any unintended tax consequences.