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Why Now = Excellent Time to Set Up a Charitable Lead Annuity Trust

Abby Axelrod-Wunderman, Director of Charitable Giving

Among the many factors swirling together in the pandemic marketplace are 1. historically low-interest rates and 2. historically high needs for increasing charitable giving to support organizations dealing with the health crisis. This makes the Charitable Lead Annuity Trust (CLAT) an attractive vehicle for individuals who want to help charities in the near term and still preserve assets for their families.

Here's how a CLAT works. 

An individual transfers cash or other property to an irrevocable trust. For a term of years, a charity designated by you (which could be a donor-advised fund) receives an income stream. The trust can be structured to maximize income tax benefits, or estate and gift tax benefits, in varying degrees. After the term of years, the remaining assets in the trust are distributed to your designated non-charitable beneficiaries.

Why is CLAT so advantageous right now? 

If over the term of the income period, the trust assets outperform the current IRS 7520 rate (which should be easy to do because rates are so low right now), the non-charitable remainder beneficiaries will receive assets with a value much higher than the taxable gift reported when the trust was created. This results in a tax-free transfer of wealth. 

What's more, if your client designates a donor-advised fund to receive the income during the term of years, the client can stay involved by recommending grants to the most appropriate charities. This is immediately helpful as the COVID-19 health crisis moves through different phases of need.

Lastly, while CLATs may be a good option for your clients and their families, gifts to donor-advised funds should still be considered during this time as well.