In the realm of estate planning, there are some acronyms used that are probably foreign to you as a layperson. We look at them from time to time on our blog, and in this post we will examine the legal device that is called a CLAT.
This acronym stands for a charitable lead annuity trust. A CLAT can be useful as a transfer tax efficiency tool under certain circumstances.
To understand the value of a charitable lead annuity trust, you should first know some things about transfer taxes. There is a federal estate tax, and there is also a federal gift tax. The two taxes are unified under the tax code.
There is a unified lifetime gift and estate tax exclusion. This is the amount that you can transfer before the tax would kick in. For the rest of 2014, the exclusion is $5.34 million; it is going up to $5.43 million next year when an inflation adjustment is going to be applied.
If you are exposed to transfer taxes, you must take steps to gain tax efficiency. A charitable lead annuity trust can be part of the plan. Here’s how it works.
You fund the trust with assets that you would expect to appreciate over the term of the trust. You name a charitable beneficiary that will receive annuity payments from the trust throughout its term. In the trust agreement, you also name a non-charitable beneficiary who will assume ownership of anything that may be left in the trust after the expiration of the term.
The Internal Revenue Service will use the hurdle rate to apply anticipated interest to the value of the trust for gift tax purposes, since a non-charitable beneficiary may be assuming ownership of a remainder.
The idea is to allow the annuity payments to the charitable beneficiary to equal all or most of the taxable value of the trust. Interest rates have been low, so the assets in the trust may well outperform the hurdle rate that was applied by the Internal Revenue Service.
If the assets do well and there is a remainder left in the trust after the expiration of the term, the non-charitable beneficiary would assume ownership of this remainder. Under ideal circumstances, there would be no gift tax exposure when the transfer takes place.
Learn More About Tax Efficiency Strategies
A CLAT can be a good choice for some people, but there are a number of different ways to mitigate your transfer tax burden. The optimal strategy will vary depending on the case in question.
If you would like to discuss your options with a licensed professional, our firm can help. We offer free consultations, and you can send us a message through this page to set up an appointment: Smithtown NY Estate Planning Attorneys.