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CLAT for tax efficiencyGiving to charitable causes and institutions can be quite meaningful when you are thinking about how you will be remembered after you are gone. If you have been very successful from a financial standpoint, you could decide to engage in philanthropic acts when you are devising your legacy plan.

You have options when you are deciding how you want to structure your charitable gift giving. One possibility is the creation of a private charitable foundation.

If you ever watch PBS, you hear about high-profile foundations that have been established by some of the wealthiest families in the country. Names like the Ford Foundation, the Rockefeller Foundation, and the Bill and Melinda Gates Foundation invariably come to mind.

Since these charitable foundations were established by members of the super-elite, you may assume that you must be a billionaire to establish a private foundation. Though this may be a logical assumption, in fact, the majority of foundations in the United States are working with less than $1 million in funding.

Another option would be the establishment of a charitable trust. One type of charitable trust that can be of great value if you want to attain estate tax efficiency as you simultaneously make the world a better place is the charitable lead annuity trust or CLAT.

Charitable Lead Annuity Trusts

If you were to establish a CLAT, you would be referred to as the grantor of the device. When you convey assets into the trust, you are removing them from your estate for estate tax purposes.

In the trust declaration, you name a charitable beneficiary, and you also name non-charitable beneficiaries.

The charitable beneficiary would receive annual annuity payments that are equal to a certain prescribed percentage of the CLAT. The non-charitable beneficiaries would assume ownership of any remainder that may be left in the trust after the expiration of its term.

In addition to the estate tax, there is also a gift tax. The non-charitable beneficiaries may be receiving a gift, so the Internal Revenue Service adds anticipated interest accrual to the taxable value of the trust using 120 percent of the federal midterm rate. This is often called the hurdle rate.

This is a good strategy to implement when federal interest rates are low, and they have been low for a while now. The idea is to allow the charitable beneficiary to receive annuity payments that are equal to all or most of the taxable value of the CLAT

When the trust term expires, there would theoretically be nothing left for the beneficiary to assume ownership of, but the assets could outperform the hurdle rate. If this takes place, there would be a remainder, and the non-charitable beneficiaries would assume ownership of that remainder free of any gift tax consequences.

Explore Wealth Preservation Strategies

To learn more about CLATs and other legal devices that provide estate tax efficiency, contact us through this page to request a consultation: Estero, FL Estate Planning Attorneys.