Charitable Lead Annuity Trusts

A charitable lead annuity trust (CLAT) inverts the charitable remainder structure. The trust pays a fixed annuity to charity for a term of years; whatever remains at the end passes to your beneficiaries. The taxable gift is the actuarial value of the remainder, which can be structured near zero by sizing the annuity against the Section 7520 rate. Asset growth above the hurdle passes to heirs transfer-tax free, and the charitable payments fund giving you may have planned anyway.

Grantor versus non-grantor CLATs

• Grantor CLAT: you take an upfront income tax deduction for the present value of the charitable stream, but you pay tax on the trust's income during the term. Useful in an unusually high-income year.
• Non-grantor CLAT: no upfront deduction, but the trust deducts its charitable payments each year without the percentage-of-income limits that apply to individuals. Cleaner for pure transfer planning.

Design considerations

• Backloading. Annuity payments can escalate over the term (within limits), leaving more capital compounding early. This materially improves the remainder in rising markets.
• Rate sensitivity. Like GRATs, CLATs are easiest to win when the 7520 rate is low relative to expected asset returns.
• No mortality reset. Unlike a GRAT, a properly structured CLAT does not return to the estate if the grantor dies mid-term.
• Commitment. The charitable annuity must be paid in down markets too. Asset selection and payout sizing need a margin of safety.