Creating a Charitable Legacy With a Charitable Lead Annuity Trust

Gabriel Katzner - November 10, 2023 - Asset Protection
charitable lead annuity trust

A charitable lead annuity trust (CLAT) is an irrevocable trust that allows donors to make yearly contributions to the charitable organization of their choice while reducing their estate tax liability and transferring assets to their beneficiaries.

This split-interest trust makes it possible to fulfill charitable giving and family wealth transfer goals. You can establish a CLAT during your lifetime or upon your death.

A CLAT comprises the charitable interest, which is wholly deductible for gift and estate tax purposes, and the noncharitable remainder interest, which is taxable for gift or estate tax purposes.

How could you use a CLAT?

Suppose you have $500,000 to put in a trust. You want the trust to provide income to your favorite charity, but you also want to transfer assets to your beneficiaries. You could establish a CLAT for this purpose.

You would:

  • Fund the trust with your $500,000
  • Determine the period in years or a lifetime that the trust would distribute an annuity to the charity.
  • Designate noncharitable beneficiaries who would receive the rest of the trust-based assets when the trust terminates.

What’s the difference between a CLAT and a CRUT?

Both a charitable lead annuity trust (CLAT) and a charitable remainder unitrust (CRUT) have a charitable organization and noncharitable beneficiaries.

Here are other similarities between the two trusts:

  • Both trusts are used to make charitable donations.
  • Both trusts are useful for reducing transfer taxes.
  • Both trusts are irrevocable, so the grantor loses access to the funds and any income they generate.

Here are some key differences:

  • Unlike charitable remainder trusts, CLATs are not exempt from income tax.
  • CLATs pay the charity yearly, and the noncharitable beneficiary when the trust terminates, and CRUTs pay the noncharitable beneficiaries yearly and the charity when the trust terminates.
  • CLATs operate for a certain period of time or the lifetime of the grantor. A CRUT is held to a 20-year term if you select the fixed-term option.

What are the benefits of a CLAT?

CLATs have several benefits, including:

  • A CLAT allows people to make regular charitable donations.
  • It provides a guaranteed income stream for the charity.
  • It provides a way to transfer wealth to beneficiaries.
  • It makes it possible to reduce estate tax liabilities.
  • Flexible terms to meet your estate and tax planning needs.
  • Can be established during your lifetime or upon your death.

How does a CLAT work?

Establishing a CLAT is similar to establishing other irrevocable trusts. The steps include:

  • Fund your trust by transferring property, cash, publicly traded stock, securities, real estate, or other assets into the trust.
  • Name a qualified U.S. charitable organization, donor-advised fund, or foundation to receive the annual payments.
  • Determine the length of the trust, either for a term in years or for the grantor’s lifetime.
  • When structured as a grantor trust, the donor receives an upfront charitable income tax deduction and then is responsible for paying income taxes on future trust income. The income tax deduction is calculated based on the trust term, the projected lead payments, and the IRS interest rate.
  • A non-grantor trust is a separate taxpaying trust that is allowed unlimited charitable income tax deductions.
  • Payouts to the charitable organization can be structured as annuity or unitrust payouts. Annuity payouts are based on a percentage of the initial value of the trust’s principal. Unitrust payouts are based on the value of the trust’s principal, calculated yearly.

Considerations when using a CLAT

CLATs are usually complicated to structure and subject to specific IRS rules, so it is a good idea to talk with your estate attorney or tax advisor before establishing one.

  • Unlike a CRUT, a CLAT is not tax-exempt.
  • CLATs require a legal setup and ongoing maintenance costs.
  • CLATs are irrevocable, so the donor loses control over the assets in the trust.
  • There can be some uncertainty over the amount of charitable giving if the donation is based on the rate of return for the trust’s investments.
  • There is a risk that a CLAT will not provide the expected tax benefits if it is not structured properly or if it does not perform as expected.

Take to your estate attorney about a charitable lead annuity trust (CLAT) and a charitable remainder unitrust (CRUT) to compare the benefits and drawbacks of each trust structure.

To discuss whether a CLAT is an appropriate estate planning tool for you, schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.


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