Charitable Giving CLT 10/30/26

What is a Charitable Lead Trust and How Does it Work?

Jeff Christie

Charitable Trusts National Expert

We’re Ren. Our philanthropy platform powers over 50% of donor-advised fund assets nationwide. Find out if your firm offers a Ren-powered donor-advised fund here, or contact us if you’re a donor or charity.

A charitable lead trust (CLT) is an irrevocable, split-interest trust that pays a fixed annuity or a percentage of trust assets to one or more charities for a set term, then passes what remains to the donor’s family or other non-charitable beneficiaries, often at a reduced gift- or estate-tax cost. The IRS classifies a CLT as a split-interest trust, and the trustee files Form 5227 each year. A donor-advised fund can be named as the charitable beneficiary, so the donor can recommend grants to charities over the term.

A Ren-powered donor-advised fund, offered through one of Ren’s partner sponsoring charities, can serve in that role, subject to the sponsoring charity’s approval. This article covers how a charitable lead trust works, the main structures, a worked example, and the risks. Tax treatment varies by situation, so check with a tax advisor.

How does a charitable lead trust work?

A charitable lead trust follows three stages:

Funding. The donor irrevocably transfers assets, such as cash, securities, or real estate, into the trust.
The lead term. For a set number of years, or for a person’s lifetime, the trustee makes annual payments to the named charity or charities.
The remainder. When the term ends, the assets left in the trust pass to the remainder beneficiaries, typically family members.

The charitable payment takes one of two forms. A charitable lead annuity trust (CLAT) pays a fixed dollar amount each year. A charitable lead unitrust (CLUT) pays a fixed percentage of the trust’s assets, revalued every year, so payments rise and fall with the trust’s value. The trust is irrevocable. Once it is funded, the donor can’t reclaim the assets.

A CLT is also either reversionary or non-reversionary. In a reversionary trust, the remainder returns to the donor at the end of the term. In a non-reversionary trust, the remainder passes to other beneficiaries, such as children. The distinction matters for taxes: reversionary structures are typically grantor trusts, and non-reversionary structures are typically non-grantor trusts, which changes who pays tax on the trust’s income, as covered below.

The IRS Section 7520 rate, published monthly, is used to calculate the present value of the charitable interest, and so the size of any tax benefit. The rate in effect when the trust is funded affects the result, and donors can generally elect the rate from the month of funding or either of the two months before it, so any example should state the rate it assumes. The IRS publishes the current rate on its Section 7520 interest rates page.

How do CLATs and CLUTs differ, and what does grantor status change?

Two choices define a CLT’s structure. The first is the payment type: a fixed annuity (CLAT) or a percentage of assets (CLUT). The second is who is treated as owning the trust for income tax purposes: the donor (a grantor trust) or the trust itself (a non-grantor trust).

	Grantor CLAT	Non-grantor CLAT	Grantor CLUT	Non-grantor CLUT
Payment to charity	Fixed dollar amount each year	Fixed dollar amount each year	Fixed percentage of assets, revalued annually	Fixed percentage of assets, revalued annually
Who pays tax on trust income	The donor, each year	The trust, with a deduction for amounts paid to charity	The donor, each year	The trust, with a deduction for amounts paid to charity
Primary planning goal	An upfront income-tax deduction plus a reduced taxable gift	Reducing gift or estate tax on assets expected to appreciate	An upfront income-tax deduction with payments that track the trust’s value	Reducing gift or estate tax with payments that track the trust’s value
Key trade-off	The donor pays tax on trust income even though it goes to charity	No upfront income-tax deduction for the donor	Payments vary, and the donor pays tax on trust income	No upfront deduction, and charity’s payments vary year to year

A non-grantor CLAT is commonly used to reduce estate tax on an asset expected to appreciate, because growth above the required payments passes to family outside the taxable gift.

A grantor CLAT tends to suit a donor who wants an income-tax deduction up front and is willing to pay tax on the trust’s income each year. CLUTs trade that certainty for payments that move with the market.

What is a zeroed-out CLAT?

A zeroed-out CLAT is structured so that the present value of the charitable lead interest equals 100% of the amount used to fund the trust, which reduces the taxable gift to the remainder beneficiaries to $0. The payout rate and trust term are set together to reach that result. Anything the trust earns above the required payments passes to the remainder beneficiaries without further gift tax.

This technique works only with a CLAT. A CLAT’s fixed annuity lets the present value be calculated precisely at funding. A CLUT’s payments are a percentage of each year’s value, so its remainder can’t be driven to zero in the same way.

The interest-rate effect is counterintuitive. With a charitable remainder trust, a low Section 7520 rate shrinks the charitable deduction. With a zeroed-out CLAT, a low rate makes the strategy more attractive: the lower the rate, the less the trust’s assets need to earn to leave something for the remainder beneficiaries.

A hypothetical example. This example is for illustration only. It is not a projection, and every figure is hypothetical. A donor funds a zeroed-out CLAT with $2,000,000. The term is 10 years, and the assumed Section 7520 rate is 5.6%, the rate for October 2026. To bring the value of the charitable interest to $2,000,000, the annuity works out to about $266,610 a year, or 13.3% of the initial funding. Over 10 years, the trust pays about $2.67 million to charity. For simplicity, the example assumes payments at the end of each year and ignores fees and taxes.

What the family receives depends on what the assets earn:

At a steady 7% a year, about $250,700 remains after the last payment and passes to the remainder beneficiaries, with no taxable gift because the gift was zeroed out.
At exactly 5.6%, nothing remains. The family receives nothing, and the charity receives its full payments.
At 4%, the trust would run out of assets about $240,000 short of the payments it owes, so the charity would receive less than planned. How a shortfall is handled depends on the trust document.

If the sponsor of a donor-advised fund is named as the charitable beneficiary, the $2.67 million would arrive in that fund over 10 years, with the donor recommending grants from it.

What are the tax benefits of a charitable lead trust?

A charitable lead trust may offer three tax advantages. None is guaranteed, and the outcome depends on the structure.

Gift and estate tax. The taxable value of the remainder gift is reduced by the present value of the charitable lead interest. A zeroed-out CLAT can reduce the taxable gift to $0.
Income tax. An upfront income-tax deduction is available only with a grantor CLT. The donor deducts the present value of the charitable interest in the year of funding, then is taxed on the trust’s income each year.
Generation-skipping transfer (GST) tax. A CLT can be structured to pass assets to grandchildren with reduced GST exposure. The GST rules are complex, so this planning needs experienced counsel.

Two different deductions are easy to confuse:

The donor’s deduction in a grantor CLT is a personal income-tax deduction. It is generally limited to 30% of adjusted gross income, with a lower limit for some types of property, and unused amounts can be carried forward for up to five years. For 2026, itemizers also face a 0.5% AGI floor on charitable deductions and a cap on the value of itemized deductions for taxpayers in the top bracket. See Ren’s 2026 charitable deductions guide for advisors.
A non-grantor trust’s deduction is the trust’s own deduction for amounts it pays to charity each year. It belongs to the trust, not the donor, and it is not subject to the same AGI-based percentage limit.

The benefit depends on the Section 7520 rate at funding, the trust term, the payment rate, and investment performance. Donors should work with qualified tax and legal counsel.

How does a charitable lead trust work with a donor-advised fund?

A donor can name a donor-advised fund sponsor as the charitable lead beneficiary. During the trust term, the trustee sends each annual payment to the donor-advised fund. The donor, or advisors the donor designates, then recommends grants from the fund to qualified charities. The sponsoring charity reviews and makes the final decision on each grant. This keeps the donor’s advisory role over where the money goes, without changing the trust’s tax treatment.

At Ren, a donor-advised fund is offered through partner sponsoring charities, which hold the assets and make the final decision on grants. For a broader comparison of donor-advised funds and charitable trusts, see our article comparing the pros and cons of a donor-advised fund vs. a charitable trust.

The full journey, from the trust to the charities:

The donor funds the charitable lead trust.
Each year, the trustee makes the required payment to the donor-advised fund sponsor.
The sponsor credits the payment to the donor’s donor-advised fund account.
The donor recommends grants from the account.
The sponsoring charity reviews the recommendations and sends grants to qualified charities.
When the term ends, the remainder passes to the family beneficiaries.

The pairing has a practical advantage. Naming one charitable beneficiary for the full term means the trust document doesn’t need to list the charities. A donor’s giving interests can change over a 10- or 20-year term, and the donor-advised fund lets them adjust where grants go without amending an irrevocable trust.

Donor-advised funds operate at significant scale. The DAF Research Collaborative reports 3.59 million donor-advised fund accounts and $327.87 billion in assets for fiscal year 2024, with $90.57 billion in contributions that year, per its Annual DAF Report.

What assets can fund a charitable lead trust?

A charitable lead trust can be funded with:

Publicly traded securities
Closely held business interests
Real estate
Cash
Other appreciated property

Appreciated assets are especially relevant. IRS Publication 5337 shows that, for tax year 2023, corporate stock accounted for 57.7% of the total amount donated in noncash gifts on individual returns. Illiquid or hard-to-value assets add complexity, because the trust still has to meet its annual payment obligations. See donating complex assets for the asset types a donor-advised fund can accept.

What are the risks of a charitable lead trust?

A charitable lead trust involves trade-offs that should be weighed before it is set up:

It is irrevocable. Once funded, the donor can’t reclaim the assets.
The payment is required. The trustee must make each annual payment even if trust income is too low, which can mean selling assets or using principal.
Investment risk. If the trust’s assets underperform, the remainder passing to family shrinks, and it can fall to zero.
Administration costs. Trustee fees, tax preparation, and the annual Form 5227 filing add cost.
Complexity. Setting up and maintaining a CLT requires legal counsel, a qualified trustee, and ongoing tax compliance.
Grantor CLAT recapture. If the donor dies before the term ends, a special rule applies to a grantor CLAT. Part of the original income-tax deduction, equal to the deduction taken minus the discounted value of the payments already made to charity, is generally treated as income in the year of death. This risk is specific to grantor CLATs and doesn’t apply to non-grantor structures.

What questions should a donor answer before setting up a charitable lead trust?

Before the trust is funded, a pre-setup liquidity stress test can show whether the structure holds up:

Can the trust make the required annual payment in a low-income year?
What happens if appreciated or illiquid assets must be sold to make a payment?
Who bears the shortfall if the assets can’t cover it?

How does a charitable lead trust compare to a charitable remainder trust?

A charitable lead trust and a charitable remainder trust (CRT) are mirror images. A CLT pays charity first and family second. A CRT pays the donor or other beneficiaries first and charity second.

	Charitable lead trust	Charitable remainder trust
Who receives payments during the term	Charity	The donor or other named beneficiaries
Who receives the remainder	Family or other non-charitable beneficiaries	Charity
Income-tax deduction timing	Upfront, for a grantor CLT only. A non-grantor CLT has no donor deduction	Upfront, based on the present value of the charitable remainder
Typical planning goal	Transfer assets to family at a reduced gift or estate tax cost while supporting charity now	Income for the donor or other beneficiaries, with a charitable gift later

For a deeper look at CRTs, see Ren’s guide to what a charitable remainder trust is. For how a donor-advised fund compares with charitable trusts generally, see donor-advised fund vs. charitable trust.

Frequently asked questions about charitable lead trusts

What are the disadvantages of a charitable lead trust?

The main disadvantages are that the trust is irrevocable, the trustee must make the required payments even in a weak year, the remainder to family depends on investment performance, and the trust has legal, administrative, and tax costs. A grantor CLAT also carries a recapture risk if the donor dies during the term. See the risks section above.

Does a charitable lead trust have to pay out annually?

Yes. The trust’s terms set the payment schedule, and the trustee must make the required payment on schedule even if trust income falls short. A CLAT pays a fixed dollar amount, and a CLUT pays a percentage of the trust’s value as revalued each year.

Who owns the assets during the trust term?

The trust holds the assets, and the trustee manages them under the trust document. The donor no longer owns them, because the transfer is irrevocable. The charity holds an income interest, and the remainder beneficiaries hold a future interest. For income tax purposes, a grantor CLT is treated as owned by the donor, but that doesn’t change who holds legal title.

What does the trustee file with the IRS?

The trustee files Form 5227 for each calendar year. Other income-tax filings depend on the trust’s grantor status, so confirm the requirements with a tax advisor.

Can the donor change the charitable beneficiary after the trust is created?

Generally not directly. The trust is irrevocable, and its terms name the charitable beneficiary. If a donor-advised fund is named as the beneficiary, the donor can recommend which charities receive grants from the fund over time, without changing the trust. The sponsoring charity makes the final decision on each grant, and the donor’s advisory role doesn’t alter the trust’s tax treatment.

How does Ren support charitable lead trusts?

Ren is the platform for philanthropy. Ren powers over 50% of donor-advised fund assets nationwide through partner sponsoring charities. A Ren-powered donor-advised fund can be named as the charitable lead beneficiary, so donors can recommend grants throughout the trust term, with the assets held by the sponsoring charity. Learn more about the charitable lead trust and the donor-advised fund, or explore all giving vehicles.

Ask an advisor whether a charitable lead trust fits the plan

A charitable lead trust is a legal and tax commitment, so a qualified attorney and tax advisor should be involved in setting one up. A financial advisor can help weigh whether a CLT, a donor-advised fund, or another vehicle fits a donor’s goals. Advisors who want to talk through giving solutions for a client can talk to an expert at Ren, or visit Ren’s page for financial advisors.

This content is for educational and marketing purposes only and is not tax, legal, or financial advice. Tax outcomes depend on your individual circumstances and current law. Invested assets may rise or fall in value, and growth is not guaranteed. Invested assets are not insured against loss. Investment options and asset acceptance are determined solely by the sponsoring charity and not by Renaissance Acquisition Company LLC or its affiliates, agents, successors and assigns (collectively, “Ren”). Please consult your own tax, legal, and financial advisors before making charitable, legal, or financial decisions.