In the realm of estate planning, a CLAT is a charitable lead annuity trust. These trusts can be useful if you want to provide assets for a charitable cause. Under certain circumstances, a CLAT can also help you gain estate tax efficiency.
Federal Estate Tax
Before we explain the intricacies of the charitable lead annuity trust, we should look at the estate tax parameters so that you can determine your level of exposure.
The estate tax credit or exclusion is the amount that you can transfer free of taxation if you are transferring assets to anyone other than your spouse. You can leave unlimited assets to your spouse without incurring any estate tax exposure, but transfers to anyone else are potentially subject to the estate tax.
For 2015, the estate tax exclusion is $5.43 million. Each year the exclusion is adjusted to account for inflation.
In addition to the estate tax, there is also a gift tax. The taxes are unified, so the exclusion is a unified exclusion. It encompasses gifts that you give while you are living along with the value of your estate.
Charitable Lead Annuity Trusts
Now that we have provided the necessary background information, we can look at charitable lead annuity trusts. When you create and fund the trust, you name a charitable beneficiary. You also name a non-charitable beneficiary, and this would typically be an heir or heirs, such as your children.
You arrange for the charitable beneficiary to receive annuity payments each year throughout the duration of the trust term. The non-charitable beneficiary would inherit any remainder that exists after the expiration of the term, and this transfer would potentially be subject to the gift tax.
The IRS adds anticipated interest using the hurdle rate, which is based on the current interest rates, and they have been low for a number of years. You could allow the charitable beneficiary to receive payments that are equal to most or all of the value of the trust, including the anticipated interest that was applied by the Internal Revenue Service.
At the end of the trust term, the non-charitable beneficiary would inherit any remainder that may exist. If the assets in the trust outperformed the hurdle rate, the transfer to the non-charitable beneficiary could take place in a tax-free manner.
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Given the 40 percent maximum rate of the federal estate tax, your legacy can take an enormous blow if you do not take steps to gain estate tax efficiency.
If you would like to discuss charitable remainder annuity trusts or any other tax efficiency tool with a licensed professional, contact us to set up a free consultation: Campbell CA Estate Planning Attorneys.
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