Charitable Lead Annuity Trust
1. What is a charitable lead annuity trust?
A charitable lead annuity trust (CLAT) is a trust that provides income distributions to the Church through your parish, the Archdiocese of Detroit Endowment Foundation, Sacred Heart Major Seminary, another archdiocesan institution or your favorite charity for a stated number of years. The distributions to the Church or charity are a fixed amount or a percentage of the value of the trust property when you establish the trust. At the end of the trust term, the remaining trust property is distributed either back to you or to other beneficiaries, typically your family.
2. Is there a required rate for the annual distribution to the Church or charity?
No. Unlike the rules for charitable remainder trusts, the tax law does not require a specific amount or percentage rate for the annual distribution to the Church or charity that you must provide in the trust agreement. Accordingly, you may provide any distribution rate you choose.
3. Is there a limit on the number of years CLAT income may be distributed to the Church or charity?
No limit exists on the number of years the CLAT may distribute income to the Church or charity.
4. Am I entitled to a charitable contribution deduction when I establish a CLAT?
It depends on the beneficiary of the remaining trust property when the CLAT terminates. If the trust property returns to you, the donor, you are considered the owner of the property in the trust. Accordingly, you are entitled to a charitable contribution income tax deduction for the present value of the future annual distributions to the Church or charity. This amount is deductible up to 30 percent of your adjusted gross income in the year you establish the CLAT. Any excess of this limitation may be carried forward for five years, to be deducted subject to the same limitation.
However, since you are considered the owner of the trust property, the trust income is taxable to you each year even though distributed to the Church or charity. You can avoid this income tax by transferring tax-exempt bonds to the trust.
If the trust agreement provides that someone other than you will receive the remaining property when the CLAT ends, you are not entitled to an income tax deduction, nor is the trust income taxable to you. You are entitled to a gift or estate tax charitable contribution deduction, which will reduce the amount of the gift to your family that may otherwise be subject to gift or estate tax. The higher the rate and number of years of payments to the Church or charity, the less the present value of the remaining gift to your family.
The Office of Planned Giving can make the calculations of these charitable contribution deductions for you, using tables developed by the Internal Revenue Service.
5. May I amend the trust agreement after the trust is established?
No, a CLAT is irrevocable, so you cannot amend or revoke it once it is established. However, you may retain power as trustee to name an alternative charitable beneficiary to the specific charities named in the trust agreement.
6. Who may be the trustee of a CLAT?
Any individual or, in Michigan, any corporation with fiduciary powers may be the trustee of a CLAT. This generally limits corporate trustees in Michigan to financial institutions like banks and some investment firms. You as donor of property to a CRAT may act as trustee, but with carefully specified powers if you wish to avoid being treated as the owner of the trust property. Moreover, if you name an individual as trustee, it is important that you also name a reliable successor trustee.
7. Does the CLAT pay income tax?
Unlike a charitable remainder trust, a CLAT is not tax-exempt. If you as donor are treated as the owner of the trust property, you will be taxed on all of the trust income, even the income distributed to the Church or charity. If you are not considered the owner, the CLAT is entitled to an unlimited charitable contribution deduction for the annual distribution to the Church or charity, but will be subject to tax on income in excess of the amount distributed.
8. What happens if the stated annual distribution to the Church or charity exceeds the income the CLAT earns on its investments?
If the stated annual distribution exceeds the income the CLAT earns on its investments, it will have to distribute trust principal to satisfy the annual distribution requirement. It is possible, therefore, that over time the trust property could be exhausted, resulting in the Church or charity and your family receiving nothing more from the CLAT.
The material presented on these pages is for your general information on stewardship, estate planning and charitable giving, and is not intended as legal advice. You should consult your attorney and tax and financial advisors for specific transactions of the points illustrated here.
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