Charitable Lead Annuity Trust

campus sceneryThe charitable lead annuity trust (CLAT) can allow you to support Colby with some of your assets and have those assets pass either to heirs or to yourself at the end of a specific term of years. This vehicle functions in the opposite way that a charitable remainder trust does; it provides the College with funds during the trust's term; then, at the termination of the trust, the trust assets pass to the identified heirs or back to you.

Many find that they can pass significant assets to the next generation with significant gift tax savings using a CLAT. Gifts during lifetime are taxed by the IRS in excess of $1 million, but the discount used by the IRS to determine the value of the CLAT's assets passing to heirs at the termination of the trust can result in minimization—and often elimination —of the gift tax on assets exceeding $1 million. For this reason, those with assets anticipated to appreciate significantly within the next 10-20 years (or the term of many CLATs) find that the CLAT affords them an opportunity to pass assets to heirs with significantly little or no gift tax, while accomplishing charitable gifting goals during the term of the trust. This is especially true when the IRS discount rate (3.0 percent as of January 2010) is low. In February 2009 it reached a historic low of 2 percent, but it has been as high as 11 percent, which results in higher gift tax exposure.

The non-grantor CLAT pays Colby a specified amount each year (expressed as a percentage of the original gift amount) for a specified number of years, after which the assets pass to heirs you have identified. At the time the gift is established, you would be required to file a gift tax return, but the gift tax obligation can be largely controlled by balancing the term of the trust with the trust payout rate. In many cases it is possible to generate a deduction large enough to offset the gift tax that otherwise would have been payable. At the end of the specified term, the assets remaining in the trust pass to the heirs you identified free of any gift or estate tax, regardless of the value of those assets at the time.

The grantor charitable lead annuity trust differs from the non-grantor version in that at the end of the trust term the assets revert to the donor. In this version, an income tax charitable deduction is generated. However, the donor is required to recognize all payments made to Colby as income for tax purposes each year of the term of the trust, and the assets are includible in the donor's estate.

It is important to note that, unlike charitable remainder trusts, charitable lead annuity trusts are taxable. Therefore it is important to secure the services of an experienced and knowledgeable trustee. Although Colby cannot serve in this capacity, we will work with you to design the trust and will assist you in finding a competent trustee.

Illustration

A donor makes a gift of $450,000 of assets that have a basis of $250,000 to a CLAT that pays Colby 5 percent for 20 years. At the end of the CLAT, the assets pass to heirs, and the IRS projects their value at just above $1M. In the meantime Colby has received $450,000. The donor created a gift to his heirs of almost $1 million while giving to Colby the amount of the original gift, $450,000, over a 20-year period.

Charitable Lead Annuity Trust illustration

Benefits
  • Immediate: Gift tax deduction of $334,741. Remove trust principal from your estate.
  • Annual: Annual payment to Colby of $22,500. Projected total payments to Colby of $450,000 over 20 years.
  • Future: Projected net to family of $1,010,328 from trust. Reduced estate taxes and costs. Trust growth transferred to family tax-free.

It is important to note that, unlike charitable remainder trusts, charitable lead annuity trusts are taxable. Therefore it is important to secure the services of an experienced and knowledgeable trustee. Although Colby cannot serve in this capacity, we will work with you to design the trust and will assist you in finding a competent trustee.