CLAT — Charitable Lead Annuity Trust
A trust that pays an annuity to your designated charity for a fixed term — then transfers the remaining assets to your heirs with minimal or zero gift tax. The charity receives first, your family receives the remainder.
If the Charitable Remainder Trust pays you income first and leaves the remainder to charity, the Charitable Lead Annuity Trust does the opposite. The trust pays a fixed annuity to your designated charity for a term of years. At the end of the term, whatever remains in the trust passes to your heirs — potentially with little or no gift tax, depending on how the annuity is structured relative to the IRS benchmark rate.
The key math: the taxable gift to heirs is calculated as the total amount going into the trust minus the present value of the charitable annuity payments. If the annuity payments are structured to return essentially the full present value of the trust assets to charity over the term, the taxable gift to heirs approaches zero — but heirs still receive whatever investment growth the trust generates above the annuity payments. This is called a "zeroed-out CLAT."
In a low-interest-rate environment, zeroing out the CLAT is easy — the annuity payments required to satisfy the IRS formula are lower, leaving more room for investment growth to accumulate for heirs. As the §7520 rate rises, the annuity payments required to zero out the taxable gift increase, reducing the strategy's effectiveness.
- Zeroed-out CLAT transfers wealth to heirs with potentially zero gift tax — the charitable annuity eliminates the taxable gift, so heirs receive the investment growth without using lifetime exemption.
- Meaningful charitable impact — the charity receives substantial annuity payments over the term. This is a genuine charitable giving vehicle, not a technical planning device.
- Income tax deduction for grantor CLAT — if structured as a grantor trust, you receive an immediate income tax deduction for the present value of the charitable annuity stream in the year of funding. This is a powerful benefit in high-income years.
- The benefit depends on investment outperformance — if the trust earns less than the §7520 rate, there may be nothing left for heirs after the annuity payments. The zeroed-out CLAT only transfers wealth to heirs if investments beat the benchmark.
- Grantor CLAT income tax — in a grantor CLAT, you pay income tax on all trust income even though the income is being paid out to charity. This is offset by the upfront deduction but requires careful cash flow planning.
- Irrevocable — the trust and the charitable beneficiary cannot be changed once established.
- Annuity payments must be made on schedule — unlike the GRAT which returns payments to you, CLAT payments go to charity and cannot be suspended or deferred.
Model the zeroed-out annuity at current §7520 rate
We calculate the annuity payment required to produce a near-zero taxable gift at the current §7520 rate, over your desired term. We also model the expected remainder to heirs at various investment return assumptions — showing the range of outcomes from conservative to optimistic.
ShurekIdentify the charitable beneficiary
The CLAT designates a specific qualified charity to receive the annuity payments. You can name your donor-advised fund as the charitable beneficiary, giving you continued flexibility over which ultimate charities receive the distributions. This is a popular approach for clients who want CLAT economics without committing to a specific charity now.
Client selects — Shurek advises on DAF vs. specific charityEstate attorney drafts the CLAT — grantor or non-grantor
The attorney determines whether a grantor or non-grantor CLAT better serves the client's goals, drafts the trust document, and establishes the trustee. The grantor vs. non-grantor decision affects income tax treatment significantly and is made based on the client's current income tax situation and the availability of the upfront deduction.
Estate attorney drafts — Shurek provides tax parametersFund the trust and begin annuity payments
Assets are transferred to the trust. The trustee begins making annuity payments to the charity on the schedule specified in the trust document. We coordinate the annual Form 709 (if any taxable gift) and annual Form 1041 for the trust.
Shurek coordinates annual compliance| Form | Name | When Due | What It Does and Why It Matters |
|---|---|---|---|
| 1040 | Individual Income Tax Return | April 15 (extension to October 15) | For a grantor CLAT, all trust income flows to your personal 1040 in the year it is earned — even though the income is being paid to charity. This creates ordinary income tax on trust earnings offset by the large upfront charitable deduction. In a non-grantor CLAT, no income flows to the personal return during the term. We advise annually on the tax impact and coordinate the trust income reporting with the personal return. |
| 709 | Gift Tax Return | April 15 of the year following funding | Documents the CLAT funding and the calculated taxable gift to heirs (which may be near zero in a zeroed-out structure). The actuarial calculation showing how the charitable annuity reduces the taxable gift is attached. Even when no gift tax is owed and no exemption is consumed, the return documents the transaction and starts the statute of limitations on IRS challenge. |
| 1041 | Trust Income Tax Return | April 15 (extension to September 30) for non-grantor CLAT | For a non-grantor CLAT, the trust files its own annual income tax return. The charitable deduction for annuity payments offsets trust income, often resulting in minimal trust-level tax. We prepare the annual trust return and coordinate the charitable annuity payment documentation with the trustee. |
Actuarial modeling to zero out the taxable gift. Grantor vs. non-grantor analysis. Form 709 preparation. Annual Form 1041 for non-grantor CLATs. Income tax coordination for grantor CLATs. Investment performance tracking relative to the benchmark. Coordination with estate attorney on trust administration and annuity payment schedule.
The CLAT has a fixed annuity schedule that must be adhered to — payments to charity cannot be delayed or restructured after the trust is established.
Trust Executed and Funded
CLAT document executed. Assets transferred to trust. Annuity schedule set and irrevocable. Charitable beneficiary confirmed.
Form 709 Filed
Documents the funding and taxable gift calculation. Actuarial calculation showing charitable deduction attached. Even with zero taxable gift, return is required.
Annuity Payment Made to Charity
Fixed annuity payments must be made on the schedule specified in the trust document. Unlike GRAT payments which come back to you, CLAT payments go to charity and are irrevocable. Late or missed payments can jeopardize the trust's tax status.
Form 1041 Filed (Non-Grantor CLAT)
Non-grantor CLAT files its own trust income tax return. Grantor CLAT income flows to personal 1040.
Remainder Passes to Heirs
Whatever investment growth accumulated above the annuity payments passes to the named beneficiaries. Final trust return filed. Trust terminated.