CHARITABLE LEAD ANNUITY TRUSTS (CLAT) Prepared by John R. Anzivino, - - PowerPoint PPT Presentation

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CHARITABLE LEAD ANNUITY TRUSTS (CLAT) Prepared by John R. Anzivino, CPA February 2012

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Characteristics of a Charitable Lead Annuity Trust

Charitable Lead Annuity Trust

Trust is for term of years

• r for a life, or lives

Remaindermen

At end of term remaindermen receive remaining corpus,

• utright or in trust

Remainder

Grantor

Transfer Assets

Charity

Charity receives payments Annuity Payments to Charity (the “Lead”)

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Characteristics of a Charitable Lead Annuity Trust

• Grantor transfers property to an irrevocable trust
• The charity receives annuity payments based on a fixed annuity
• The charity could be a family foundation
• The trust pays a fixed amount to charity each year
• If the assets transferred to the trust outperform the IRS assumed

interest rate (§7520 rate), the excess earnings and growth will pass to the remaindermen at the end of the trust term free of gift and estate taxes

• The remainder trust property may pass outright or be held

further in trust to postpone the transfer of assets to younger generations

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Zeroed-Out CLAT Gift Tax Consequences

Charitable Lead Annuity Trust (20 years)

– Transfer Date: Feb 2012 – FMV of Trust: $1,000,000 – Annual Payout: $ 57,680 – PV of Qualifying Interest: $1,000,000 Present Value of the Qualifying Interest (the Lead)

$1,000,000 Taxable Gift $0

FMV of Property Transferred

$1,000,000

=

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Why are They More Popular?

• Interest rates are currently at a record low, creating a greater
• pportunity to outperform the IRS §7520 rate. Earnings and

growth in excess of that rate pass to the remaindermen free of gift and estate transfer taxes

• With the §7520 rate at only 1.40% (February 2012) fixed

payouts necessary to “zero-out” selected term-certain CLATs are as follows:

– 10 year – 10.787% – 15 year – 7.438% – 20 year – 5.768%

• Valuation discounts applicable to family limited partnerships and

certain other entities can create the opportunity to leverage the benefits of CLATs

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Key Planning Idea Grantor or Non-Grantor Trust

Grantor Type Trust

• Grantor reports all income/gains during term of trust
• Grantor obtains an income tax charitable contribution deduction

in the year of creation and not in subsequent years when annuity payments are made to charity

• May be beneficial if the grantor’s future income or future income

tax rates are expected to decline

Non-Grantor Type Trust (Most Often Used)

• Grantor does not report any income from the trust
• Grantor gets no income tax charitable contribution deduction
• Trust will have to pay income tax if trust income is in excess of

deductions (including deduction for annuity amount paid to charity)

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Key Planning Idea Ordering the Tax Attributes

To insure that a Non-Grantor type CLAT maximizes the income tax charitable deduction allowed under IRC §642(c), the trust document should characterize distributions in the following order:

• Ordinary income
• Capital gain
• Unrelated business taxable income
• Tax-exempt income
• Trust corpus

Failure to

• rder

the character

• f

payments to the charitable beneficiary will result in all distributions following the tier system set forth by local law, or as pro-rata distributions of all of the items of the trust’s income if local law is silent.

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Key Planning Idea Investing the Assets

When managing a non-grantor type CLAT the investment advisor should strive to have the annual “taxable” income (ordinary income and capital gains) equal the annuity payment plus other deductions such as investment management fees and tax preparation fees

• If CLAT income exceeds deductions then income tax will be owed
• If CLAT deductions exceed income then the deductions amount in

excess of income is lost forever

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Key Planning Idea Structure CLAT with Increasing Annual Payouts

• Treas. Reg. Sec. 25.2702-3(b)(1)(i) and (ii)

Qualified Annuity

• Irrevocable right to receive a fixed amount
• Must be payable . . . at least annually

Fixed Amount

• Stated dollar amount
• Not less frequently than annually
• Only to the extent the amount does not exceed 120 percent of

the stated dollar amount payable in the preceding year

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Zeroed-out CLAT – 20 Years $1,000,000 Funding Contribution