Estate and Charitable Planning Guide
What Is a Charitable Lead Trust (CLT)? A Guide for High-Net-Worth Families
A charitable lead trust (CLT) is an irrevocable trust that pays income to one or more charities for a set term of years or for a person's lifetime. When that term ends, the remaining assets pass to family members or other noncharitable beneficiaries. A CLT is designed to combine giving to charity with passing wealth to heirs at a potentially lower gift or estate tax cost.
This guide explains how a charitable lead trust works, how it compares to a charitable remainder trust, what the current IRS Section 7520 rate means for CLT design, and how founders and affluent Pennsylvania families can evaluate one before a liquidity event.
The Basics
How a Charitable Lead Trust Is Structured
A charitable lead trust reverses the order of a charitable remainder trust. In a CLT, charity receives the "lead" interest first, meaning the payments made during the trust term. Your heirs, or in some designs you, receive the "remainder" interest that is left at the end.
According to the IRS, CLTs generally take one of two payment forms. Families usually choose based on how they expect the trust assets to grow and how predictable they want the charitable payments to be.
A CLT is a gift that cannot be undone. Once you fund it, you generally cannot get the assets back or change the core terms. It also needs a trustee, professional appraisals for hard-to-value assets, and ongoing tax reporting that depends on how the trust is classified for income tax purposes.
Charitable Lead Annuity Trust (CLAT)
Pays charity a fixed dollar amount each year, set at funding. If the trust's assets do better than the assumptions used to value the charitable payments, the extra value can pass to the remainder beneficiaries. If they do worse, the fixed payments can use up principal and leave less, or nothing, for heirs.
Charitable Lead Unitrust (CLUT)
Pays charity a fixed percentage of the trust's value, revalued every year. Payments go up and down with the trust's value. Compared with a CLAT that has equivalent terms and the same investment assumptions, a CLUT generally passes less appreciation to the remainder beneficiaries, because the charity's payments grow as the trust grows.
Grantor vs. Non-Grantor CLT
Each type can be set up as a grantor trust or a non-grantor trust for income tax purposes. That choice changes who gets the charitable deduction and who pays tax on the trust's income. Both versions are explained below.
Key Figures as of October 2026
The Numbers That Shape CLT Design
6.20%
IRS Section 7520 rate for November 2026. For qualifying charitable transfers, the September (5.40%) or October (5.60%) rate may be elected instead.
0.5%
New floor beginning in 2026: individuals who itemize can generally deduct charitable gifts only above 0.5% of their contribution base
30%
General limit on a grantor CLT deduction, as a share of the donor's contribution base (20% may apply to capital gain property)
4.5%
Pennsylvania inheritance tax rate on transfers to direct descendants and lineal heirs. Qualifying charitable transfers are exempt.
For taxpayers in the top federal bracket, Section 68 also reduces itemized deductions by 2/37 under a statutory formula. In practice, that generally limits the benefit of those deductions to about 35 cents per dollar.
Sources: IRS Rev. Rul. 2026-21; IRS Rev. Rul. 2026-17; IRS Section 7520 Interest Rates; Treas. Reg. 1.7520-2; 26 U.S.C. 170; 26 U.S.C. 68; P.L. 119-21; IRS Rev. Proc. 2007-45; Pennsylvania Department of Revenue. Figures retrieved October 22, 2026.
Step by Step
How a Charitable Lead Trust Works
Every CLT follows the same basic steps, although the details depend on your goals, the assets you use, and the IRS rate used to value the gift.
Set Your Goals and Choose Beneficiaries
Decide which charities will receive payments. These could include a public charity, a private foundation, or a donor-advised fund, subject to the trust's terms and applicable rules. Then name the family members who will receive what is left.
Pick the Structure and the Term
Choose between a CLAT and a CLUT, and between grantor and non-grantor status. Then set the term, either a fixed number of years or one or more measuring lives. The payment amount and the term together determine how much of the gift is assigned to charity and how much to heirs.
Value the Gift and Choose the Valuation Month
The IRS uses the Section 7520 rate to determine the present value of the charitable interest and of the remainder interest passing to heirs. For a CLAT, a lower rate generally increases the calculated value of the fixed charitable annuity payments, which reduces the taxable value of the remainder gift. Under certain circumstances, taxpayers may elect to use the rate for the month of funding or for either of the two preceding months (Treas. Reg. 1.7520-2). Choosing the valuation month can materially affect the trust's transfer tax efficiency.
| Rate month (for a qualifying November 2026 funding) | Section 7520 rate |
|---|---|
| September 2026 | 5.40% (Rev. Rul. 2026-17) |
| October 2026 | 5.60% |
| November 2026 | 6.20% (Rev. Rul. 2026-21) |
Rates retrieved October 22, 2026. Whether the election is available, and how it is made, should be confirmed with your tax advisor.
Fund the Trust
An estate attorney drafts the trust document, and you transfer assets into it, such as cash, marketable securities, real estate, or private business interests. Hard-to-value assets usually need a qualified appraisal. You may also need to file a gift tax return for the remainder interest. Our 2026 gift tax exclusion guide covers how these gifts are reported.
Make Charitable Payments During the Term
The trustee invests the assets and pays charity as the trust requires. The trust's tax reporting depends on its income tax classification and the reporting rules that apply to it. Certain private foundation rules, including the self-dealing restrictions, generally apply to CLTs.
Distribute the Remainder
When the term ends, whatever is left passes to your heirs, either outright or into a continuing trust such as a dynasty trust. How much they receive depends on the required payouts, investment results, taxes, and expenses over the term. It could be little or nothing.
Side-by-Side Comparison
Charitable Lead Trust vs. Charitable Remainder Trust
The main difference is who gets paid first. A CLT pays charity first and your heirs later. A CRT pays you or other named people first and gives what is left to charity. For a deeper look, see our CRT vs. CLT comparison.
| Feature | Charitable Lead Trust (CLT) | Charitable Remainder Trust (CRT) |
|---|---|---|
| Who receives payments during the term | One or more charities | You or other named noncharitable beneficiaries |
| Who receives what is left | Family or other noncharitable beneficiaries | One or more charities |
| Primary planning focus | Passing wealth to heirs while giving to charity | A stream of payments to you or others, with a charitable gift at the end |
| Income tax status of the trust | Taxable (grantor or non-grantor); not tax-exempt | Generally tax-exempt. Distributions are taxed to beneficiaries under IRS ordering rules, which treat payments as ordinary income first, then capital gain, then other income, then principal. |
| Upfront income tax deduction | Only for grantor CLTs, subject to percentage limits, the 2026 0.5% floor, and other itemized deduction rules | Yes, for the present value of the charitable remainder, subject to the same individual deduction rules |
| How the Section 7520 rate affects it | Higher rates generally increase the taxable remainder gift of a CLAT. A lookback to either of the two prior months' rates may be available. | Higher rates can increase the charitable deduction for annuity-style CRTs |
| Key risk | Payouts, investment results, taxes, and expenses decide what is left for heirs, which may be little or nothing | The gift cannot be undone, and your payments depend on the trust's assets |
This table summarizes general federal rules. Your results depend on how the trust is drafted, your personal tax situation, and current law.
Income Tax Treatment
Grantor vs. Non-Grantor CLT: Who Gets the Deduction?
Whether a CLT is set up as a grantor trust often matters as much as whether it is a CLAT or a CLUT. Each approach has trade-offs, and the 2026 changes to individual charitable deductions make the comparison more involved.
Grantor CLT
You may be able to take an upfront income tax deduction for the present value of the charitable payments. IRS guidance generally describes a limit of 30% of your contribution base, and 20% can apply to gifts of capital gain property. Unused deductions may carry forward. In exchange, you pay income tax on the trust's income for every year of the term, with no extra deduction for the annual charitable payments.
Beginning in 2026, individuals who itemize generally may deduct charitable contributions only to the extent they exceed 0.5% of their contribution base. Taxpayers in the top federal bracket may also get a smaller benefit from itemized deductions under Section 68. These limits, along with the 20% or 30% limits and carryforward rules, should be built into any analysis of a grantor CLT's upfront deduction. It should not be assumed that the full calculated deduction produces immediate tax savings.
Non-Grantor CLT
You get no personal upfront income tax deduction. Instead, the trust is a separate taxpayer. It may deduct amounts of its gross income paid for charitable purposes under IRC Section 642(c), as long as the governing instrument and the statute's requirements are met. Payments made from principal rather than from qualifying gross income do not generate this deduction.
The 642(c) deduction is generally not subject to the individual AGI percentage limits, but exceptions apply, including rules on unrelated business income. Families often use this version for estate and gift tax planning rather than for a personal deduction.
For how the 2026 charitable floor affects other year-end giving decisions, see our 2026 year-end tax planning guide.
Sources: 26 U.S.C. 170; 26 U.S.C. 68; P.L. 119-21; IRS Rev. Proc. 2007-45; IRS Publication 526; IRS Publication 6109. Retrieved October 22, 2026.
Pennsylvania Considerations
Charitable Lead Trusts for Pennsylvania Families
Pennsylvania's main tax at death is its inheritance tax, which works quite differently from the federal estate tax. According to the Pennsylvania Department of Revenue, the rate is 0% for transfers to a surviving spouse, 4.5% to lineal heirs, 12% to siblings, and 15% to other heirs. Transfers to exempt charitable organizations are exempt.
Pennsylvania also taxes trusts under its own personal income tax rules, which do not simply follow federal trust taxation. Our Pennsylvania inheritance tax planning guide and Pennsylvania trust tax planning guide cover the broader framework.
- 1 Testamentary CLTs and inheritance tax. Pennsylvania's inheritance tax adds another layer to CLT planning. Although qualifying charitable transfers are exempt, a CLT that ultimately benefits family members has both charitable and noncharitable interests. How those interests are valued and taxed depends on Pennsylvania law and on the trust's structure. Families should model the state inheritance tax separately rather than assume the federal charitable deduction translates into equivalent Pennsylvania savings.
- 2 Future interests and contingencies. When a contingency makes it impossible to know at death which rate will apply once an interest vests, the Department may assess tax at the highest rates that could apply unless the family requests a future interest compromise. A July 2026 Department ruling (INH-26-001) treated a contingent charitable interest as having no value for inheritance tax purposes. Drafting choices can matter.
- 3 State trust income tax. Under Act 64 of 2023, income of a resident grantor trust is generally taxable to the person treated as its owner under specified federal provisions (PA PIT Guide). For non-grantor trusts, the PA-41 Schedule DD charitable deduction is conditional: income generally must be permanently set aside for charity under the governing instrument. A non-grantor CLT's federal 642(c) deduction may therefore not carry over to the state return.
- 4 Individual income tax and gains. Pennsylvania personal income tax generally does not follow the federal itemized charitable deduction (see the PA PIT guide), so a federal deduction from a grantor CLT may not lower your state tax. Gains on trust assets are generally taxed at the state's flat rate, as explained in our Pennsylvania capital gains guide.
- 5 Coordination with federal planning. A CLT is usually one part of a larger plan that also considers the 2026 federal estate tax exemption, your lifetime gifts, and your other trusts.
For Founders and Business Owners
When a CLT May Make Sense Before a Liquidity Event
Founders often look at a charitable lead trust in the year before a business sale. That year can bring unusually high income, a strong wish to give to charity, and assets expected to grow in value. A CLT may help meet several of these goals at once, but timing and structure carry real risk.
Giving shares after a sale is effectively locked in can raise "assignment of income" problems. Under that doctrine, the IRS may tax the gain to you rather than to the trust.
Gifts of private business interests need extra analysis. Depending on the entity type and the trust's structure, shareholder eligibility limits (for example, for S corporation stock), the excess business holdings rules, and valuation requirements may narrow the options. A grantor CLT also generally leaves the donor responsible for income tax on gains the trust recognizes. For an expected sale, the deal timeline and the trust structure should be evaluated before any shares are transferred. Our guide to financial planning before selling a business covers the broader timeline.
A Year With Unusually High Income
A grantor CLT funded in the year of a sale may produce a sizable federal deduction in that year. How much of it actually reduces tax depends on the 20% or 30% limits, the 2026 0.5% floor, the Section 68 reduction for top-bracket taxpayers, and the carryforward rules. In exchange, you pay tax on the trust's income in later years.
Assets Expected to Grow
A CLAT can pass investment growth to heirs when the trust's assets do better than the assumptions used to value the charitable interest. Lower Section 7520 rates generally make the strategy more attractive, because they raise the present value of the charitable payments and shrink the taxable remainder gift. The rate was 6.20% for November 2026, with 5.40% (September) and 5.60% (October) potentially available under the lookback election. Still, the amount that actually reaches heirs depends on the trust's payouts, investment results, taxes, and expenses, not simply on whether returns beat the Section 7520 rate.
Ongoing Philanthropy and Family Involvement
Steady payments over several years can fund a family foundation or donor-advised giving while the next generation learns how the family's wealth is managed. A CLT should also be planned alongside QSBS planning and any GRAT or SLAT already in place.
Trade-Offs to Weigh
Disadvantages and Common Mistakes With Charitable Lead Trusts
A charitable lead trust is a complex, irrevocable vehicle. Before funding one, families should understand the main drawbacks.
For simpler giving, a donor-advised fund or a qualified charitable distribution may meet your goals with far less complexity, though each has its own limits.
Our Approach
How Defiant Capital Group Evaluates a Charitable Lead Trust
Defiant Capital Group is an independent, fiduciary RIA led by Jonathan Dane, CFA, CFP. We help founders, business owners, and affluent families decide whether a CLT fits their wider estate and tax strategy. We then work with each family's estate attorney and CPA, who draft the trust documents and prepare the tax filings.
Our firm was founded by entrepreneurs, so we look at charitable planning through the eyes of an owner preparing for a transition. The aim is to bring tax, investment, and estate decisions together instead of making each one separately. As fiduciaries, we work to put your goals first. Certain conflicts may still exist and are described in our regulatory disclosures.
What a CLT Review Typically Covers
- 1Your charitable goals and what you want to pass to heirs, compared side by side
- 2CLAT vs. CLUT and grantor vs. non-grantor trade-offs based on the current Section 7520 rate
- 3Which assets to contribute and when, relative to a potential liquidity event
- 4How the trust's investments are managed during the term
- 5Pennsylvania inheritance and income tax effects
FAQ
Charitable Lead Trust Frequently Asked Questions
What Is a Charitable Lead Trust in Simple Terms?
A charitable lead trust is an irrevocable trust that pays charity first, for a set number of years or for a lifetime, and then passes the remaining assets to your family or other beneficiaries. It is designed to support charity while potentially lowering the gift or estate tax cost of passing wealth to heirs.
What Are the Disadvantages of a Charitable Lead Trust?
The main disadvantages are that it cannot be undone, it carries investment risk, and it is complex and costly to run. What heirs receive depends on the payouts, investment results, taxes, and expenses over the term, and it may be little or nothing. Grantor CLTs make you pay tax on trust income every year, and their upfront deduction is limited by several 2026 rules. Private foundation rules can also restrict certain transactions.
What Is the Difference Between a Charitable Lead Trust and a Charitable Remainder Trust?
The difference is who gets paid first. A CLT pays charity during the term and gives what is left to your heirs. A CRT pays you or other named people during the term and gives what is left to charity. CRTs are generally tax-exempt, with distributions taxed under IRS ordering rules. CLTs are not tax-exempt.
What Is a Charitable Lead Annuity Trust?
A charitable lead annuity trust (CLAT) is a CLT that pays charity a fixed dollar amount each year. The IRS uses the Section 7520 rate to value the charitable payments and the taxable remainder, so lower rates generally reduce the remainder gift. The rate was 6.20% for November 2026, according to IRS Rev. Rul. 2026-21. The rate is a valuation assumption, so what heirs actually receive depends on investment results, taxes, and expenses.
Can You Choose Which Month's Section 7520 Rate Applies?
In many cases, yes. When part of a transfer qualifies for a charitable deduction, the taxpayer may elect to use the Section 7520 rate for the month of the transfer or either of the two preceding months, under Treas. Reg. 1.7520-2. For a November 2026 funding, the choices would be 5.40%, 5.60%, or 6.20%. The election is made with the return, so confirm the details with your tax advisor.
Who Pays Tax on Charitable Lead Trust Income?
It depends on how the trust is set up. In a grantor CLT, you pay tax on the trust's income each year, in exchange for a possible upfront deduction. In a non-grantor CLT, the trust pays its own tax and may deduct qualifying charitable payments made from gross income under IRC Section 642(c). Pennsylvania applies its own trust tax rules, and its charitable deduction for trusts is more restrictive, so state results can differ.
Can a Charitable Lead Trust Reduce Pennsylvania Inheritance Tax?
It may, but the savings should not be assumed. Pennsylvania exempts qualifying transfers to charity. However, a CLT that ultimately benefits family members has both charitable and noncharitable interests, and how each is valued and taxed depends on state law and the trust's structure. Transfers to lineal heirs are taxed at 4.5%, per the PA Department of Revenue, so the state inheritance tax should be modeled separately.
Sources
- IRS, Section 7520 Interest Rates: irs.gov (retrieved October 22, 2026)
- IRS, Rev. Rul. 2026-21 (November 2026 Section 7520 rate): irs.gov (retrieved October 22, 2026)
- IRS, Rev. Rul. 2026-17 (September 2026 Section 7520 rate): irs.gov (retrieved October 22, 2026)
- Treas. Reg. 1.7520-2 (valuation month election): ecfr.gov (retrieved October 22, 2026)
- 26 U.S.C. 170 (charitable contributions, including the 0.5% floor): uscode.house.gov (retrieved October 22, 2026)
- 26 U.S.C. 68 (limitation on itemized deductions): uscode.house.gov (retrieved October 22, 2026)
- Public Law 119-21: govinfo.gov (retrieved October 22, 2026)
- IRS, Special Types of Trusts: irs.gov (retrieved October 22, 2026)
- IRS, Charitable Remainder Trusts: irs.gov
- IRS, Rev. Proc. 2007-45 (sample inter vivos CLAT forms): irs.gov (retrieved October 22, 2026)
- IRS, Publication 526, Charitable Contributions: irs.gov (retrieved October 22, 2026)
- IRS, Publication 6109: irs.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, Inheritance Tax: pa.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, PA PIT Guide, Estates, Trusts and Decedents: pa.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, 2025 PA-41 Schedule DD and Instructions: pa.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, REV-1647 Schedule M Instructions (Future Interest Compromise): pa.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, Ruling INH-26-001 (July 1, 2026): pa.gov (retrieved October 22, 2026)
- Pennsylvania Department of Revenue, PA PIT Guide, Deductions and Credits: pa.gov
Next Step
Evaluate Whether a Charitable Lead Trust Fits Your Plan
If you are weighing a CLT alongside a business sale, a large charitable commitment, or a plan to pass wealth to the next generation, our team can review the trade-offs with you and your estate attorney. Whether a CLT is suitable depends on your circumstances.
Schedule a ConsultationDefiant Capital Group · Warrendale | Wexford | Pittsburgh, PA · 412-697-1435 · defiant@defiantcap.com