Estate Planning Alert:  The Charitable Lead Trust


            Sometimes you will have a year with an unusually large amount of taxable income, perhaps from the sale of an appreciated asset, a Roth conversion or a large bonus.   If you are charitably inclined, a charitable lead trust may be an appropriate vehicle to obtain a large charitable deduction, yet leave some portion of the donated assets to heirs. 

            A charitable lead annuity trust (CLAT) is the opposite of a charitable remainder trust.  In the latter, annual payments of a fixed amount are made to the donor or other non-charitable beneficiaries for a term of years or the donor’s lifetime, with the remainder passing to charity.  In a CLAT, on the other hand, annual payments of a fixed amount are made to charity for a term of years or the donor’s lifetime, with the remainder passing to one or more non-charitable beneficiaries.   If the CLAT is a “grantor” CLAT (i.e, the trust income is taxable to the grantor) for a term of years, the donor receives an immediate income tax deduction for the value of the income interest given to charity.  The deduction will be 100% of the contribution to the CLAT if the payout rate to charity is sufficiently high, thus creating a “zeroed out” CLAT. 

            Of course, you always could make an outright donation to charity, but your heirs then would receive nothing.  With a CLAT, on the other hand, if the growth of the CLAT exceeds the Section 7520 rate (which is currently near historical lows), there will be a remainder left for heirs at the end of the income interest.  For example, a $100,000 contribution in June 2016 to a 15-year CLAT with a payout rate of 7.776% will produce a 100% charitable deduction, yet leave $26,573 to heirs if the CLAT grows at 4%/year, $88,372 if the CLAT grows at 6%/year, and $109,042 if the CLAT grows at 8%/year.   Moreover, in a “zeroed-out” CLAT (see above), the amount received by your heirs is free of gift and estate taxes, and the wealth transfer is enhanced by the fact that the taxes on the CLAT income are paid by the grantor (essentially resulting in additional tax-free gifts to your heirs). 

            If you are interested in having ongoing input into the selection of charitable recipients, the income beneficiary of the CLAT can be a donor-advised fund (DAF), with you as the advisor. 

            As you can see, in the appropriate circumstances a CLAT may provide you with income tax benefits, significant wealth transfer to heirs and flexibility in accomplishing your charitable objectives.  Should you have any questions regarding CLATs or other plans for charitable donations, please contact one of our estate planning attorneys.