CLATs offer rare wealth transfer opportunity
The current environment of historically low interest rates has some experts heralding a "golden age of CLATs."
More formally known as Charitable Lead Annuity Trusts, these planned giving vehicles pay a fixed amount to charity each year for a specific period of time. At the end of the term, the balance of the trust is paid out to the beneficiaries (often the donor's children or other heirs).
This results in potential tax benefits to the donor, including an income tax deduction for the charitable donations and savings on both gift and estate taxes.
Since February, section 7520 interest rates have continued to drop, reaching an all-time low of .4% in August 2020. This presents a rare opportunity for tax-free wealth transfers to younger generations. With careful planning, advisors can help their clients select a term and payout amount for the CLAT that effectively brings the actuarial value of the remainder interest – and therefore the taxable gift to heirs – to zero. This strategy allows clients to pass significant amounts of wealth to their family members without using any of their federal credits for gift and estate taxes.
Notably, the charitable beneficiary of the CLAT can be the donor's own donor-advised fund, giving the donor and their family increased flexibility for where and when the charitable assets are spent. If your client does not yet have a donor-advised fund, you can help them establish one at Akron Community Foundation in as little as a day and potentially continue to manage the assets. Your client can also engage their children and grandchildren in their philanthropy by naming them as successor advisors to the fund and creating a family giving plan through The Center for Family Philanthropy.
Ultimately, the timing may never be better for your clients to use a CLAT. Not only will they create an income stream to charity and satisfy their current goals for philanthropy, they will also establish a future gift to heirs with the trust’s remainder.
This content is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.