Preservation | Family Wealth Protection & Planning

For those who are charitably inclined, planning techniques are available that may provide for both income and transfer tax savings in the current economic and low interest rate environment. These techniques include making charitable contributions of assets to private foundations or donor advised funds. However, charitable lead trusts are another particularly beneficial charitable giving vehicle in today’s environment given the current low interest rates.

A Charitable Lead Annuity Trust (CLAT) specifically could be an advantageous technique for charitably inclined individuals. A CLAT is an irrevocable trust that provides for the payment of an annual fixed dollar amount to a designated charity until the end of a specified term (the charitable lead interest), and which, at the end of the payment period, distributes the remaining trust assets (the remainder interest) to non-charitable beneficiaries. These beneficiaries are typically members of the donor’s family.

The CLAT may be funded during the donor’s lifetime or at his or her death. Assets transferred to an inter vivos (during lifetime) CLAT will not be included in the donor’s estate for estate tax purposes (assuming the donor did not retain any powers over the trust and is not the non-charitable remainder beneficiary). If the assets of an inter vivos CLAT are included in the donor’s estate, the donor will be entitled to a charitable estate tax deduction for the value of the charitable lead interest, determined as of the donor’s date of death. A testamentary CLAT will also result in an estate tax charitable deduction, and the non-charitable remainder interest will be subject to estate tax. The GST tax rules must also be considered when the remainder beneficiary will be the donor’s grandchildren or any beneficiary who qualifies as a skip person.

The current low interest rate environment makes CLATs even more attractive. So long as investment performance in the CLAT exceeds the rate used to determine the annuity amount at creation, a greater portion of assets pass to the remainder beneficiaries, potentially with minimal gift tax impact. Thus, with the variety of charitable giving vehicles available, a CLAT is another charitable giving technique to consider.

Please contact an attorney in our Trusts & Estates Practice Group if you have questions related to CLATs.

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