By Harry Prabandham · Updated September 28, 2026
Estate & Legacy
Charitable Lead Trusts: How CLATs and CLUTs Work
A charitable lead trust pays a charity for a set term, then passes what remains to family, reducing the taxable gift or estate value of that remainder.
Charitable Lead Trusts: How CLATs and CLUTs Work
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What is a charitable lead trust?
- It is an irrevocable trust that pays a charity first, for a term of years or a lifetime, and then passes the remaining assets to family or other non-charitable beneficiaries.
- It is the mirror image of a charitable remainder trust, where you receive payments first and the charity receives what's left.
- The transfer-tax value of the family's remainder is reduced by the IRS-calculated present value of the charity's payments.
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Full Guide
What is a charitable lead trust?
- It is an irrevocable trust that pays a charity first, for a term of years or a lifetime, and then passes the remaining assets to family or other non-charitable beneficiaries.
- It is the mirror image of a charitable remainder trust, where you receive payments first and the charity receives what's left.
- The transfer-tax value of the family's remainder is reduced by the IRS-calculated present value of the charity's payments.
How does a CLT reduce gift or estate tax?
- At funding, the gift or estate tax deduction equals the present value of the charity's payments, calculated using the Section 7520 rate.
- If the trust's investments earn more than that rate, the excess passes to the family remainder without additional transfer tax.
- If investments earn less, the family may receive little or nothing, while the charity's payments still come first.
What is the difference between a CLAT and a CLUT?
- A charitable lead annuity trust (CLAT) pays the charity a fixed dollar amount each year.
- A charitable lead unitrust (CLUT) pays a fixed percentage of the trust's value, revalued each year.
- A CLAT shifts more upside to the family when assets grow faster than the 7520 rate; a CLUT's payments rise and fall with the trust's value.
- For grandchildren, CLATs are a poor fit because GST exemption is measured at the end of the term; CLUTs allow allocation at funding.
Grantor or non-grantor CLT: which tax treatment applies?
- A grantor CLT gives you an upfront income tax deduction, but you pay tax on the trust's income every year of the term.
- If grantor status ends early, including at your death, part of that deduction can be recaptured as income.
- A non-grantor CLT pays its own income tax and deducts its charitable payments, but you receive no upfront income tax deduction.
What are the costs and risks?
- The trust is irrevocable, and the charity's payments must be made even in years when investments fall.
- Legal drafting, trustee fees, annual trust returns, and valuations for hard-to-value assets add ongoing cost.
- Self-dealing and other private foundation rules generally apply, which restrict transactions between the trust and family members.
Key takeaways
- A CLT pays charity first and family second, reducing the transfer-tax value of the family's share.
- Results depend on returns relative to the 7520 rate at funding, which is not predictable.
- The CLAT versus CLUT and grantor versus non-grantor choices have real tax consequences.
- Rubric coordinates CLT planning with your estate attorney and CPA; confirm the design with them.
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