It’s well known in certain quarters that a charitable lead annuity trust (CLAT) works well in a low-interest-rate environment.
We’re in such an environment, so let’s drill down into the CLAT.
First, the big picture. A CLAT makes an annuity payment to charity for either a fixed term of years or a life. The life may be that of the trust’s creator. It also may be that of certain of the creator’s family members, although I’ve never worked on such a CLAT.
- At the end of the trust term, all trust assets pass to noncharitable parties, typically the donor’s kids.
- The kids generally receive the assets free of income tax.
- Any growth in the value of CLAT assets also passes to the kids free of estate tax.
OK, so you know all that. So let’s up the ante and look at a CLAT that’s used by a few sophisticated estate planners for very wealthy clients. Here’s how it works. Donor sets up a grantor CLAT (meaning all CLAT taxable income will be taxed to Donor). The CLAT is designed to run for Donor’s life and to have an escalating payout to charity. Details omitted, the yearly payout is small but non-negligible until Donor dies. Upon Donor’s death, the CLAT makes a sizable balloon payment to charity and then terminates.
Donor funds the CLAT with a fully paid insurance policy on Donor’s life. And maybe with some liquid assets. The insurance policy  doesnt throw off any taxable income (so it doesn’t produce a grantor trust problem) and  provides the means for the balloon payment.
Bottom line: Donor gets an up-front income tax charitable deduction for the initial present value of the charitable payout. Donor is able to use the CLAT to pass the “excess” insurance proceeds to Donor’s kids free of estate tax.
This type of CLAT, in my experience, is wielded by high-end financial planners who know the ins and outs of life insurance.
If you have questions about CLATs, send them to info@SHARPEnet.com. I’ll answer them next time.
Giving Through Charitable Lead Trusts
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