What is a charitable lead trust?
Depends on growth, rates, and design
A charitable lead trust pays a charity an annuity or unitrust amount for a term, then passes the remaining assets to your family. Under IRC §170(f)(2)(B), you get an upfront income tax deduction only if you are treated as the trust's owner, which also makes you taxable on its income. For gift and estate tax, the charity's interest is deductible under §§2522 and 2055, so growth above the §7520 rate can pass with little transfer tax.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- A grantor CLT gives an upfront income tax deduction, but the grantor pays tax on the trust's income every year.
- A nongrantor CLT gives no upfront income tax deduction; the trust deducts its charitable payments under §642(c).
- The taxable gift is the value of the remainder, computed with the §7520 rate for the month of the transfer.
- If the assets earn less than the §7520 rate, your heirs may receive little or nothing.
- CLTs are subject to the private foundation self-dealing rules.
What it is
A charitable lead trust, or CLT, reverses a charitable remainder trust: charity receives the payments first, and your family receives what remains. Payments can be a fixed annuity (a CLAT) or a fixed percentage of the trust's value each year (a CLUT). The term can be a set number of years or measured by lives.
CLTs are mainly transfer tax tools for people with substantial estates who also want to support charity over a period of years.
Because the trust is irrevocable, the payout rate, term, charities, and remainder beneficiaries should be settled before funding, with any flexibility, such as the power to change charities, written into the document.
What the law says
IRC §170(f)(2)(B) disallows an income tax deduction for an income interest given in trust unless it is an annuity or unitrust interest and the grantor is treated as the owner of that interest under the grantor trust rules. Treas. Reg. §1.170A-6(c) implements this rule. If the grantor dies or stops being treated as owner before the term ends, part of the deduction is recaptured.
For gift and estate tax, §2522(c)(2)(B) and §2055(e)(2)(B) allow a deduction for the charity's lead interest only if it is an annuity or unitrust interest. The remainder passing to family is a taxable gift valued at the time of the transfer using the §7520 rate. A nongrantor CLT is a separate taxpayer that deducts its charitable payments under §642(c). Under §4947(a)(2), CLTs are subject to the private foundation rules on self-dealing and, in some cases, excess business holdings and jeopardizing investments.
Requirements and tests
Key design and compliance points:
- The charitable interest must be an annuity or unitrust interest to be deductible.
- There is no minimum or maximum payout and no minimum remainder, unlike charitable remainder trusts.
- The §7520 rate for the month of the transfer, or either of the two prior months if elected, sets the value of the charity's interest.
- For a CLAT that skips a generation, the GST exemption is applied at the end of the term under §2642(e), which makes allocation harder to predict.
- The trust files Form 5227 each year.
- Transactions between the trust and you or your family are generally prohibited under the self-dealing rules.
How it works
You transfer assets to the trust. The charity's interest is valued as the present value of the payments using the §7520 rate; the remainder is the taxable gift. If the payments are set so the charity's interest equals nearly all of the transfer, the taxable gift is close to zero. At the end of the term, whatever remains passes to your beneficiaries without further gift tax, even if the assets have grown far more than assumed.
If you choose a grantor CLT, you also receive an income tax deduction for the value of the charitable interest in the year of the transfer, subject to AGI limits, but you report the trust's income each year without a further deduction for its payments. A nongrantor CLT pays its own tax and deducts the charitable payments.
The choice of payout drives the result. A CLAT's fixed payments make the transfer tax outcome easier to predict, and a zeroed-out CLAT sets payments so the remainder's value is close to zero. A CLUT's payments rise and fall with the trust's value, which spreads investment risk between the charity and the family.
Assumptions: Funded in 2026 with $1,000,000; the charity receives $70,000 at the end of each year for 20 years.; An assumed §7520 rate of 5.0% is used for illustration only; the actual rate for the month of funding will differ.; Values use a simple present-value annuity factor (12.4622) rather than the exact IRS table factor.; Scenario 1 assumes a 9% annual total return; Scenario 2 assumes 4%. No taxes are paid from the trust.
| Total paid to charity over 20 years | $1,400,000 |
|---|---|
| Present value of the charity's annuity at 5.0% ($70,000 × 12.4622) | $872,355 |
| Taxable gift of the remainder | $127,645 |
| Scenario 1 (9% return): amount passing to heirs after 20 years | $2,023,202 |
| Scenario 2 (4% return): amount passing to heirs after 20 years | $106,658 |
The same trust passes about $2.0 million to heirs if assets earn 9%, but only about $107,000 if they earn 4%, while the taxable gift is about $128,000 either way.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The IRS reviews valuation of hard-to-value assets contributed to CLTs, compliance with the annuity or unitrust requirements, and self-dealing. If returns on trust assets fall short of the §7520 rate, the remainder shrinks, and in a CLAT it can be exhausted before the term ends.
Assets that are hard to value, such as closely held business interests, need a qualified appraisal, and the IRS can challenge discounts that reduce the reported gift.
Who it is not for
A CLT is not for people who want the income stream themselves, since the charity receives the payments. It is not a good fit for assets unlikely to outperform the §7520 rate, or for smaller estates that are unlikely to owe estate tax. The trust is irrevocable.
How ebotCPA helps
We model the payout, term, §7520 rate, and growth scenarios, compare grantor and nongrantor designs, and prepare the gift tax return and annual trust filings. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
Do I get an income tax deduction for a charitable lead trust?
Only for a grantor CLT, under IRC §170(f)(2)(B). You then report the trust's income each year. A nongrantor CLT gives no upfront income tax deduction.
How is the gift to my heirs valued in a CLT?
The remainder is valued when the trust is funded, using the §7520 rate for that month, and the charity's annuity or unitrust interest is subtracted as a gift tax deduction.
What happens if the CLT's investments underperform?
If returns are below the §7520 rate, the amount left for heirs shrinks and can reach zero in an annuity trust.
What is the difference between a CLT and a CRT?
A CRT pays you and leaves the remainder to charity; a CLT pays charity and leaves the remainder to your beneficiaries.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.