What Are Charitable Lead Annuity Trusts?

A charitable lead annuity trust (CLAT) is a vehicle for testamentary planning that can help to zero out estate tax as you plan to gift your estate to a charitable organization. A CLAT allows a donor to leave a charitable legacy with an organization of his or her choosing. A CLAT is a split-interest trust. The trust pays annuity over a term of years to a beneficiary. This beneficiary is a charity that will be receiving money in regular installments. At the end of the term of the CLAT, all assets still in the trust will be distributed to a non-charitable beneficiary, such as an individual or into another trust that is a non-charitable one.

The biggest benefit to a CLAT is that the estate tax can be reduced to zero per charitable deduction. This is based on the value of the present interest of the annuity payable over a term of years. The annuity amount is calculated from the term of the CLAT and the applicable rates that are set when the CLAT is first set up and administered. Normally, the CLAT must adhere to a 7520 interest rate. This changes from year to year. The longer the CLAT term, the smaller the annuity payments. This can help people to avoid paying excessive amounts of money to give to a charity.

It is important to know that CLATs are subject to the private foundations rules set by the IRS. Testamentary CLATs are preferable when there is considerable other wealth that will go to other beneficiaries. This is because if a decedent only leaves a CLAT, then the beneficiaries will have to wait until the end of the CLAT term in order to get their financial gifts.

Depending on the annuity rates a CLAT may be a financially wise decision or a financially foolish one. Don't hesitate to hire a professional estate planning attorney to help you with your decisions concerning CLATs and other financial choices. Use this probate directory to locate a trusted attorney near you that can help you to determine whether or not a CLAT is the best idea!