I understand you are interested in learning if a charitable lead annuity trust, i.e., a CLAT, would be a suitable instrument for your charitable giving needs.
A CLAT is an irrevocable split-interest trust that provides for a specified amount to be paid to one or more charitable beneficiaries during the term of the trust. The principal remaining in the trust at the end of the term is paid over to, or held in a continuing trust for, a noncharitable beneficiary or beneficiaries identified in the trust. If the terms of a CLAT created during your (i.e., the donor) life satisfy the applicable requirements, a gift of the charitable lead annuity interest will qualify for the gift tax charitable deduction and/or the estate tax charitable deduction. In general, the estate and gift tax charitable deductions available are equal to the present value of the annuity interest. An annuity interest must be valued using tables published by the IRS. The method for valuing a charitable lead annuity interest is set forth in the regulations. In certain cases, the gift of the annuity interest may also qualify for the individual income tax charitable deduction. The value of the remainder interest is treated as a taxable gift by you at the time of your contribution to the trust.
CLATs are not subject to any minimum or maximum payout requirements. The governing instrument of a CLAT must provide for the payment to a charitable organization of a fixed dollar amount or a fixed percentage of the initial net fair market value of the assets transferred to the trust. Alternatively, the governing instrument of a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period, provided that the value of the annuity amount is ascertainable at the time the trust is funded. The annuity payments may be made in cash or in kind. If the trustee distributes appreciated property in satisfaction of the required annuity payment, the trust will realize capital gain on the assets distributed to satisfy part or all of the annuity payment and the trust will be allowed a deduction for the realized capital gains.
There are two types of inter vivos CLATs: (1) a nongrantor CLAT, and (2) a grantor CLAT. The income tax consequences are different for each.
A nongrantor CLAT is subject to the tax provisions relating to trusts. To qualify for the applicable estate and gift tax charitable deductions, a nongrantor CLAT must provide for the payment of a guaranteed annuity amount at least annually to a qualified charitable organization for each year during the annuity period. A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years or for one or more measuring lives. An amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer may be ascertained at the time of the transfer to the trust. A charitable interest expressed as the right to receive an annual payment from a trust equal to the lesser of a sum certain or a fixed percentage of the trust assets (determined annually) is not a guaranteed annuity interest.
In determining its taxable income, a nongrantor CLAT can deduct any amount of gross income paid for charitable purposes as specified in Code Section 170(c). Generally, you are not entitled to any income tax charitable deduction. A nongrantor CLAT is a complex trust that is taxable as a separate entity. The trustee of the trust must apply for a tax identification number for the trust.
A CLAT is a grantor CLAT if you are treated as the owner of the entire CLAT. The value of the charitable lead annuity interest in a grantor CLAT may be deductible by you for the year in which you made the contribution to the trust, provided that the other applicable requirements are satisfied. During the term of the grantor CLAT, you are taxed on all trust income and capital gains and you are entitled to no further charitable deduction for income tax purposes as the charitable annuity payments are made to charitable organizations each year.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
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Email: DonFitchCPA@paylesstax.com
Website: https://www.paylesstax.com
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 04132021)