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IRS Posts Charitable Lead Annuity Trust Letter Ruling

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The Internal Revenue Service has posted an anonymized version of a letter ruling concerning a charitable lead annuity trust (CLAT).

(Related: Grantor Retained Annuity Trusts Show Up in Times Report on Trumps)

A CLAT is a vehicle used in estate planning. A CLAT letter ruling could be of interest to financial professionals who are using life insurance, annuities or other instruments to help wealthy clients with estate planning.

The taxpayer who is setting up the CLAT at the heart of the new IRS letter ruling plans to create a revocable trust.

If the taxpayer dies before the taxpayer’s spouse, then the trust is supposed to pay specified debts and expenses, then distribute property and cash to other individuals and trusts.

If the spouse dies first, the trust is supposed to pay specified expenses and make specified distributions of property and cash to people and trusts. The trust is than supposed to push the assets left over into a CLAT.

The CLAT is supposed to pay a charity an annuity amount equal to 5% of the fair market value of the initial trust estate.

A CLAT is supposed to have a benefit stream that lasts a specified number of years.

Leslie Finlow, a senior technician reviewer at the IRS Office of Associate Chief Counsel for passthroughs and special industries, writes in the letter ruling that the IRS will treat the CLAT as having a benefits payment term of a specified term.

Even though the term will depend on the amount of assets that ends up in the CLAT, calculating the term will be possible once the trust ends up with its share of the estate, Finlow writes.

If the taxpayer, the spouse and the trust meet a variety of conditions, the taxpayer’s estate should be able to take a tax deduction for the present value of the annuity payments from the CLAT, Finlow adds.

“To the extent any estate, succession, legacy, or inheritance taxes are paid from the residue prior to funding the CLAT pursuant to the terms of revocable trust or by the law of the jurisdiction under which the estate is administered, the amount of the charitable deduction in either estate is determined using the actual amount passing to the CLAT after payment of such taxes,” Finlow writes.

A letter ruling gives the views of one IRS official.

Taxpayers can’t cite letter rulings as precedent, but, in practice, tax advisors often see letter rulings as evidence for how IRS officials are thinking about tax issues.


A copy of the letter ruling is available here.

— Read CLATs: Maximizing Philanthropy and Wealth Transfer for Clients, on ThinkAdvisor.

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