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 $10.86 million ($5.43 million per individual in 2015) from estate tax with relatively little planning. But what about clients whose estates exceed this threshold? For them, historically low interest rates have made the CLAT an effective strategy for potentially maximizing their wealth transfer goals while also benefiting charity.
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.
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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 $20 million. The Smiths are concerned about the impact of estate taxes on the legacy they wish to leave to their children and the charitable organizations they wish to support.