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Charitable Lead Annuity Trust (CLAT): A Comprehensive Guide
A Charitable Lead Annuity Trust (CLAT) is one of the two types of charitable lead trusts. A charitable lead trust is a trust that names a charity as the initial beneficiary and then names a non-charitable beneficiary (like the donor or the donor’s family member) as the beneficiary when the initial term ends. CLATs pay the charitable beneficiary a fixed “annuity” amount each year — hence the “A” in “CLAT.” CLATs are popular because they allow a donor to support charity while also retaining an interest in the donated asset for themselves or a family member. The CLAT appeals the most to people who (a) are charitably inclined, (b) want a large income tax deduction, and (c) would like to pass wealth to their children, nieces and nephews, or other family members in a tax-efficient way. The CLAT is simultaneously an income-tax strategy and an estate-tax strategy.
With a CLAT, a donor can put an asset in trust and receive a deduction equal to 100% of the asset’s value. The trust will make annual distributions to charity for a specified period of time (often between 20 and 30 years). At the end of the term, the remaining principal will either revert to the donor or pass to the donor’s chosen family member(s). Structurally, the CLAT is very similar to its cousin, the Grantor Retained Annuity Trust (GRAT), but the annual annuity payments are made to charity rather than the donor.
Watch this 5 minute video to learn about how to reduce your taxes using CLAT
CLTs vs. CRTs
In many ways, a charitable lead trust (CLT) can be understood in direct contrast to Charitable Remainder Trusts (CRTs). CLTs and CRTs are two common types of “split-interest trust” — that is, a trust that benefits both charitable and non-charitable beneficiaries. With a CRT, the grantor places assets into a trust, invests tax free, receives distributions during the term of the trust, and then distributes what’s left at the end to charity. With a CLAT, by contrast, the grantor places money into the trust, receives an up-front tax deduction, makes a donation to charity every year of the trust’s term, and then the donor or another designated beneficiary receives the remainder of the assets after the final charitable contribution.
How Do CLATs Work?
How does a CLAT work
Here’s how CLATs work in greater detail:
You put assets into the trust. You can seed the trust with nearly any asset — cash, public and private equities, real estate, or crypto, for example — and reinvest the gains in other assets throughout the whole term of the trust.
You receive an immediate tax deduction for as much as 100% of the value of the assets put into the trust. A big tax deduction means you’re going to pay less in taxes this year: If you have $1 million of gains from the sale of an asset, you’re going to be on the hook for anywhere from $238,000 to $528,000 (depending on the character of the income and where you live). With a CLAT, you can reduce that tax bill by as much as 60%. Any deduction that you don’t use in year 1 can be carried over for up to five years.
You use the trust’s funds to make the same investments you would have made out of a regular taxable account.
The trust makes a distribution to your chosen charity every year. To maximize tax efficiency, these donations are backloaded; the trust will give a very small amount in the early years — a fraction of a percent of the trust’s assets — and more toward the end.
You or your beneficiaries receive what’s left over at the end of the trust’s term (which can last for as long as you want: a predetermined number of years or your lifetime).
Taxes. You won’t pay taxes on the assets in the trust until income is realized.
Need some help to understand if CLAT’s are right for you?
Upfront income tax deduction. You can write off already realized income that would be taxed at a high rate, such as ordinary income or short-term capital gains, and reinvest what would otherwise be taxed. The deduction in year 1 can be as high as 100% of the amount contributed to the CLAT. Charitable deductions are capped at 60% of adjusted gross income for cash gifts and 30% of adjusted gross income for non-cash gifts, but any unused charitable deductions can be carried forward for up to five additional years.
Estate and gift tax savings. In 2024, the lifetime gift and estate tax exemption is $13.61 million. But by giving to a CLAT, rather than making a gift to another type of trust like an Intentionally Defective Grantor Trust, a donor can transfer wealth to a loved one without using up any lifetime exemption. At the end of the CLAT term, the remaining principal — potentially a very large amount — will simply pass, free of gift tax, to the remainder beneficiaries.
The Downsides of CLATs
There is a liquidity tradeoff: The money inside a CLAT is locked away for the entirety of the trust’s term, much like a retirement savings account or IRA. That said, the donor can direct the trust’s investments during that time, so the donor has control over investment outcomes, and the donor can choose the trust’s term. Typically, people set up these structures for a minimum of 15 years, as the benefits compound and significantly increase beyond this length.
It is an irrevocable trust: A gift to a CLAT is irrevocable — that is, you can’t claw it back. Once it’s gone, it’s gone. By making a gift to a CLAT, you’re making a substantial charitable commitment, so it’s important not to set up a CLAT unless you’re serious about supporting charity. In many cases, while gifting to a CLAT will be more tax efficient than gifting directly to a public charity or gifting to a donor advised fund or private foundation, you will still be worse off, personally, than if you hadn’t made the charitable gift to begin with. The charity will be better off, though!
A CLAT Example
Jeff, a lawyer who lives in Manhattan, started trading crypto a few years ago and has had a good couple of years. He decided to take some of his gains off the table — about $300,000 — but didn’t realize that they would all qualify as short-term capital gains. After accounting for his $500,000 of W-2 income, he’s looking at a close to $400,000 tax bill for this calendar year.
The good news is that Jeff can use a CLAT. By pursuing this strategy:
Jeff will get to deduct 100% of the current value of the assets he puts into the trust and reinvest the tax savings. In this case, that’s a $300,000 deduction that translates into immediate tax savings this year of about $150,000.
Jeff will get to support his favorite charity in a big way.
Jeff, by naming himself as the beneficiary of the CLAT, will get to retain any investment returns inside the CLAT in excess of the IRS hurdle rate (likely around 4% IRR).
What would these tax savings, investment gains, and donations mean for Jeff’s bottom line? After 25 years of approximately 8% growth, Jeff expects to end up with about $1.3 million in total payouts. Nearly $360k will go to the charity of his choice — that’s the bargain he struck when he chose a Charitable Lead Annuity Trust — so he will end up with about $971,000 in his pocket.
If, instead, Jeff had paid his taxes up front and reinvested the remainder — about $150,000 — in a regular, taxable investment account, he would have ended up with about $761,000 after taxes.
Are you having more questions about CLATs? Check out our case study on reducing your ordinary income with a CLAT or, estimate your own potential returns with our easy to use calculator.
We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.
From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.
Mani is the founder and CEO of Valur. He brings deep financial and strategic expertise from his prior roles at McKinsey & Company and Goldman Sachs. Mani earned his degree from the University of Michigan and launched Valur in 2020 to transform how individuals and advisors approach tax planning.
