Why You Might Want a Charitable Lead Annuity Trust in Your Estate Plan

The IRS has posted an anonymized version of a letter ruling about charitable lead annuity trusts (CLAT), a trust used in estate planning. In case you were wondering, anonymized means that any information in the letter ruling that could be used to identify the parties involved, has been removed.

A CLAT letter ruling could be of interest to those who are using life insurance, annuities, or other instruments in estate planning.

Think Advisor’s recent article, “IRS Posts Charitable Lead Annuity Trust Letter Ruling,” explains that if the taxpayer passes away prior to the taxpayer’s spouse, the trust is supposed to pay specified debts and expenses, then distribute the trust assets to other individuals and trusts.

If the spouse dies first, the trust is supposed to pay specified expenses and make specified distributions of the assets to individuals and trusts. The trust is then supposed to push the remaining assets into a CLAT. The CLAT is then to pay a charity an annuity amount, that is equal to 5% of the fair market value of the initial trust estate.

A CLAT is designed to have a benefit stream that lasts a specified number of years.

Leslie Finlow, a senior technician reviewer at the IRS Office of Associate Chief Counsel for passthroughs and special industries, said in the letter ruling that the IRS will treat the CLAT as having a benefits payment term of a specified term.

While the term will depend on the amount of assets that winds up in the CLAT, determining the term will be possible, when the trust ends up with its share of the estate, she noted.

If the taxpayer, the spouse, and the trust meet a number of conditions, the taxpayer’s estate should be able to take a tax deduction for the present value of the annuity payments from the CLAT, Finlow explained.

“To the extent any estate, succession, legacy, or inheritance taxes are paid from the residue prior to funding the CLAT pursuant to the terms of revocable trust or by the law of the jurisdiction under which the estate is administered, the amount of the charitable deduction in either estate is determined using the actual amount passing to the CLAT after payment of such taxes,” Finlow writes.

Note that a letter ruling gives the views of one IRS official. A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's situation.

Reference: Think Advisor (August 19, 2019) “IRS Posts Charitable Lead Annuity Trust Letter Ruling”