Advising high-net-worth clients requires a working knowledge of various wealth transfer strategies. One strategy that has been garnering a lot of attention from wealthy families over the past few years is the charitable lead annuity trust (CLAT). Looking at the current tax structure and economic environment, it's easy to see why.
Current estate tax laws allow a married couple to effectively shelter
What Is a CLAT?
A CLAT is an irrevocable split-interest trust with two beneficiaries. The lead beneficiary is a charitable organization that receives a fixed annual payment throughout the term of the trust. The remainder beneficiary, commonly the children of the couple or individual establishing the trust, receives the assets left at the end of the trust term.
A CLAT can be established as a grantor trust or as a nongrantor trust, which is a separate tax-paying entity. For our purposes, this post will refer to the nongrantor version, as our focus is on gift and estate planning, not income tax planning.
The CLAT in Action
To understand the benefits of the CLAT, let's look at a hypothetical scenario. Your best clients, the Smiths, have a net worth of close to
You recommend that they establish a 5% 10-year CLAT and fund it with
Simple, right? So what's the big deal?The benefit lies in the gift tax leverage the clients can gain when implementing the trust. The assets used to fund the CLAT are considered a gift and thus carry tax liability. Because a portion of the assets is the vested interest of a charitable organization, however, clients escape paying gift tax on the entire
In our example, that amount would be
Why Bother With a CLAT for the Smiths?
What I haven't mentioned is that the annuity and remainder interest is calculated today using the Applicable Federal Rate (AFR), which, at 1.8% (as of
If, in our example, the trust assets grow at a rate above 1.8%–say, 7%–the appreciation will pass to the children free of any gift or estate tax. The charitable organization will still receive a cumulative annuity total of
This is a simple example, but it provides a framework for understanding how a CLAT could be the right strategy for some of your high-net-worth clients. Remember, though, to seek the expertise of an estate planning attorney for help in implementing this strategy.
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