Zeroed Out CLATs

December 12, 2013. An ambitious technique to use with a charitable lead trust is, for the purposes of the gift and estate tax, to “zero” out the remainder interest. When setting up the trust, the donor is still subject to a tax on the remainder interest that eventually finds itself into the hands of a non-charitable beneficiary. Which might mean an estate or gift tax, exemption depending. If the CLT is set up as an annuity trust with fixed dollar payments that are at least as high as the applicable federal rate over a sufficient number of years, the actuarial value of the remainder interest in the trust will be zero since looking forward, more will be paid out of the trust than the trust will be considered to have been able to produce in that time. But, if the trust manages to earn income at a rate better than the AFR, then a sizeable piece of principal can be distributed estate and tax free to your beneficiaries. Unfortunately, this is very difficult to achieve since it relies on a guarantee that you can’t give, namely, that the assets will do better than the AFR. There are strategies that can stack the deck in your favor, like providing assets whose value has been artificially depressed, say though a family limited partnership, and thus produce income at a rate greater than expected.

Before going this route, however, I would ask how important charitable donations are in your estate plan, and chose the right vehicle from there rather than trying to map your values to a scheme.

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