A Charitable Lead Annuity Trust (CLAT) is an irrevocable trust that makes fixed annual payments to a charity for a set period of time, with the remaining assets ultimately passing to family members or other beneficiaries.
CLATs are often used by families who want to combine charitable giving with long-term estate planning. If the assets inside the trust grow faster than the IRS assumed growth rate used when the trust is established, that excess appreciation may eventually pass to heirs with reduced transfer-tax exposure.
Because a CLAT separates charitable payments from the remaining trust assets, it can create a structure that supports both philanthropic goals and multi-generational wealth planning.
A grantor CLAT provides an immediate charitable income tax deduction when the trust is established, while the grantor remains responsible for taxes generated by trust income during the term.
CLAT Case Study
After selling a portion of his manufacturing business, Michael wanted his estate plan to reflect two priorities that had become increasingly important to his family. He wanted to make a meaningful commitment to several charitable organizations they had supported for years, and he wanted to think carefully about how future growth in his assets could eventually transfer to his children.
As part of that planning, Michael established a 20-year CLAT funded with $10 million of investment assets. The trust was designed to make fixed annual payments to charity throughout the term while allowing the remaining assets to stay invested for the benefit of his family. Over the life of the trust, the charitable payments exceeded $15.5 million.
The trust assets also performed well during that period, growing faster than the 4.6% IRS hurdle rate used when the CLAT was created. By the end of the 20-year term, approximately $40.6 million passed into trusts for Michael’s children outside of his taxable estate.
Summary
Michael’s CLAT generated more than $15.5 million in charitable payments over the trust term while ultimately transferring approximately $40.6 million to trusts for his children outside of his taxable estate. The structure allowed him to support charitable organizations that were important to his family while also creating a more tax-efficient transfer of future wealth to the next generation.
The right solution often involves more than one type of trust working together.
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CLAT FAQs
Is a CLAT revocable?
No. A CLAT is an irrevocable trust, which means the trust generally cannot be changed or undone once it has been established and funded.
Why do people use CLATs?
People often use CLATs when they want to combine charitable giving, a large up-front income tax deduction, with estate planning. The structure can be especially useful when someone wants to support charitable organizations during the trust term while allowing remaining assets to pass to family members later.
What types of assets are commonly used in a CLAT?
CLATs are often funded with assets that are expected to appreciate over time, such as investment portfolios, closely held business interests, or other growth-oriented assets. The stronger the growth above the IRS hurdle rate, the more compelling the transfer benefit may become.
How do charitable payments work in a CLAT?
The trust makes fixed annual payments to one or more charitable organizations or a donor advised fund for a specified period of time. Those payments are established when the trust is created and continue throughout the trust term.
What happens at the end of the trust term?
After the charitable payment period ends, the remaining trust assets pass to the designated beneficiaries, often children or trusts created for their benefit.
Why does investment growth matter in a CLAT?
Investment growth matters because the strategy is designed to shift appreciation above the IRS assumed growth rate. If the trust assets outperform that rate, the excess growth passes to beneficiaries with zero transfer-tax exposure.
