Transfer Wealth With A CLAT
Boston Consulting Group senior partner, Ron L. Nicol, earned an executive M.B.A. at Duke University and is currently the chairman of Fuqua’s Board of Visitors. After being a nuclear submarine officer in the Navy for seven years, he approaches all financial decisions with thoroughness and precision. Thus, he is to be believed when he says this is an excellent time to execute a charitable lead annuity trust (CLAT).
“It’s such a tax-efficient way to do charitable giving. It’s almost like it’s to good a deal to turn down,” says Nicol. He maintains that CLATs are underutilized because “these things are being described to people by attorneys instead of businesspeople.”
A CLAT pays a set amount to charity for a set number of years, with what is left at the end going to your children or other individuals. At the time you establish your CLAT, the IRS values your ultimate gift to your children by projecting the CLAT will earn a fixed rate of return based on interest rates at that time. This charitable midterm rate is now only 2 percent, compared with 8 percent in 2000. Therefore, if you set up a CLAT now and the trust earns more than 2 percent, you are transferring wealth to heirs at a discount or even tax-free.
To utilize a CLAT, you need both charitable intent and a net worth that will exceed the lifetime estate and gift-tax exemption of $5.43 million per person in 2015. Nicol and his wife have set up their CLAT with $1 million in appreciated stock in 2012, when the charitable midterm rate was 1.2 percent. It will pay $40,000 a year to Duke for 30 years, and what is left at the end will go to their daughters. If the trust earns 1.2 percent, nothing will be left for their kids. However, if it earns 7 percent, there will be $3.7 million for their daughters. “I look at it as, ‘Hey, the government is giving you the taxpayer and the charitable organization a tremendous opportunity.’”
See Ashlea Ebeling, Precision Wealth Transfer With A CLAT, Forbes, Dec. 10, 2014.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.