The Testamentary Charitable Lead Annuity Trust Revisited

A testamentary charitable lead annuity trust is a great way for wealthy clients to give to charity and still provide for their family. It pays money to charity for a certain period of time, and then the remaining assets go to the family. The estate gets a tax deduction for the money given to charity. It’s like a charitable remainder trust in reverse. A CLT can be a charitable lead annuity trust (CLAT), which pays a specific amount from the trust’s assets, or a charitable lead unitrust (CLUT), which pays a percentage of the trust’s value. In a CLAT, any extra money in the trust goes to the family, while in a CLUT, the payments can change based on the value of the trust. CLATs are often used in estate planning by clients who want to benefit their family and believe the trust’s value will increase. CLATs can also be set up to avoid estate taxes. This article will focus on CLATs. A charitable lead annuity trust (CLAT) can last for a certain number of years or for the lifetime of certain people. It can benefit charities and family members. The trust gets a tax deduction for the income it gives to charity, but it must have enough taxable income to fully use this deduction. If the income is from capital gains or dividends, the deduction is reduced. A Charitable Lead Annuity Trust (CLAT) is a way for a trust to give money to charity for a certain amount of time, and then give the rest to family members. The amount of money given to charity depends on the current interest rates. If the rates are low, the family members may get more money in the end. There are specific rules that need to be followed when giving out the money, and it’s important to set up the trust in a way that follows these rules. Basically, a charitable lead annuity trust (CLAT) can be set up in a way that makes the value of the charitable gift equal to 100% of the assets put into the trust. This can result in no estate tax for the amount put into the trust. With a 20-year term and a 6% rate, the annual payment to charity would be 8.7185% of the trust’s value. Any investment earnings above 6% would go to the family after the 20 years. A zero-out CLAT is a way to donate to charity and reduce estate taxes. It involves setting up a trust with a formula for payments to charity, which ensures that no taxes are owed. You can also include a provision to reduce the donation if estate taxes are eliminated or reduced. This can be a good strategy for married couples to use. At the end of the CLAT term, the family members will receive the entire trust principal, which is not reduced by income tax because the CLAT receives an income tax deduction for the amounts of gross income it distributes to the charitable lead interest. To have a successful CLAT, it’s important to carefully select assets that will provide a high yield to fund the CLAT. This can include using interests in family partnerships and LLCs to leverage the return through the use of discounts. Another option is to sell a discounted interest in the entity to a child or a dynastic trust in return for a promissory note with a payment rate equal to the CLAT payments, and then contribute the note to a CLAT. This technique would result in passing all growth in excess of the discounted note amount to the family remainder interest. If the family business is used to fund the CLAT, steps must be taken to make sure it makes enough money to support the charity. If it doesn’t, we may have to sell some of the business or borrow money. If the business doesn’t make enough money, we may have to give it some of our own money. Make sure that any discounts used to value your assets when you pass them on to family or to charity are consistent. If you use a discount for your estate, make sure the same discount is used when funding a charitable trust to avoid reducing the charitable deduction. You can use a private foundation as the recipient of the charitable trust, which allows for more control over the family assets. There are also ways to provide for your family during the term of the trust, such as through insurance. It’s important to plan carefully and consider different scenarios to make sure your assets are distributed as you wish. The chart shows how planning with the CLAT/Partnership can help a family keep more of their money and pass it on to future generations, compared to no planning or just setting up a foundation. It also shows how much life insurance would be needed to make up for the lost wealth in the no planning scenario. These examples are based on a family with $13.33 million in assets held in a limited partnership. There is a plan called the CLAT/Partnership example that can help reduce taxes for a family’s assets. In this plan, a portion of the assets is put into a trust that will make annual payments to a foundation for 20 years. The rest of the assets are put into a partnership with a discount, so they won’t be taxed as much when passed on to the next generation. The trust will eventually sell its remaining assets to a special trust set up for the family, with no extra taxes. The foundation has to pay a small annual tax and also give away some of its assets to charity every year. No money is given to family members from the trust or the foundation. “Future value of family wealth” refers to passing on wealth to the third generation after taxes are paid. The bar charts show how much money goes to the family, a foundation, charity, and the IRS in three scenarios. This is important for estate planning and ensuring the family’s financial future.

Source: https://www.floridabar.org/the-florida-bar-journal/the-testamentary-charitable-lead-annuity-trust-revisited/