It’s Mid-December and You Want to Help Your Favorite Charity By Year-End, Have You Looked at a CLAT?

Dear Clients, Colleagues, and Friends,

What is a CLAT you ask? CLAT stands for Charitable Lead Annuity Trust. Sounds complicated, right? Well, not really. Let’s see what Paul did with his CLAT this December.

A CLAT is a very efficient way to do your charitable giving–almost too good to be true–but the IRS allows you to do this. In fact, the current Commissioner of the Internal Revenue Service, John Koskinen, set up a CLAT in 1998 to fund scholarships at his Alma Mater and a 4500 seat soccer and lacrosse stadium. To make the CLAT most effective, you should have desire to help your favorite charities and a net worth exceeding, or expecting to exceed, the lifetime exemption ($5.43M per person/$10.86M per couple) in 2015.

Paul set up his CLAT with a $1M contribution to benefit his Alma Mater and then his 3 adult kids in 25 years. His Alma Mater will receive $50,000 per year for 25 years, and the remaining amount, if any, will go to his 3 adult children. If the trust earns just 2.0% on its investments, there will be nothing left for his kids when the CLAT trust period ends. But if the trust assets earn a modest 7%, there will be over $3M for his children to supplement their retirement. Not bad.

What makes this type of charitable gifting so unique is that at the time you establish the CLAT, the IRS values your ultimate gift to your children by projecting the CLAT will earn a fixed rate of return based on the interest rates at the time. This rate is now a low 2%, so you are effectively transferring wealth to the kids at a discount or even tax-free. There will likely be a significant portion of the CLAT available for the kids after the program to the charity ends in 25 years.

Other aspects of the CLAT are compelling as well. Paul can remain as the trustee of the CLAT and manage the investments or delegate that chore to the professionals. In this variety of CLAT, the trust reports the annual income, say $65,000, and takes a $50,000 annual charitable deduction. It is this excess $15,000 each year that builds up over 25 years and passes to the children free of all gift and estate taxes with the flexibility to change programs his CLAT endows.

If you would like more information on establishing your own CLAT, feel free to contact us. There is still time to do your own CLAT before the end of the year.

Posted in Client Alert.