CLAT 101

A charitable giving and tax planning strategy known as the Shark-Fin charitable lead annuity trust (Shark-Fin CLAT), is a split-interest trust that is designed to offer substantial fixed and determinable benefit to a taxpayer’s favorite charity, while also providing the taxpayer’s heirs with the potential for an excess benefit that is contingent on assets held in the trust outperforming the IRS’s established rate of return. 

A CLAT involves the contribution of property to an irrevocable trust that requires annual annuity payments to charity over a term that can either be: (1) a fixed number of years; or (2) based on the life of an individual.  The value of the charitable annuity is determined by discounting the scheduled annuity payments to charity back to present value at the IRC section 7520 rate, which the IRS sets monthly.  A CLAT that is structure as a grantor trust for income tax purposes provides the grantor with an income tax charitable deduction for the present value of the charitable annuity, but the grantor must pay tax on any income that may be earned by the CLAT during the term. Additionally, the grantor receives a gift tax charitable deduction for the present value of the charitable annuity so the only difference between the amount contributed to the CLAT and the present value of the charitable annuity is preserved as a taxable gift to the remaindermen. 

See Jordan Smith, Time to Head Back Into the Water, Wealth Management, Nov. 21, 2014.