Frequently Asked Questions

How is the "immediate" charitable income tax deduction that is generated by the iCLAT actually calculated for tax purposes?


This is one of the key concepts of the iCLAT. The charitable income tax deduction is simply determined by a "present value" calculation of the iCLAT's payments to charity during its term, that's it. This expressly set forth in IRC 170(c) and Treasury Reg. 1.170-A6. This is a very important concept to understand, because unlike charitable remainder trusts, pooled income funds and charitable gift annuities, the charitable deduction generated by all charitable lead trusts is NOT based on the appraised value of the asset used to establish the trust or CGA. The interest rate used to determine the present value of the charitable payments is the IRS §7520 interest rate, which is published monthly by the IRS. One of the reasons that the iCLAT is a compelling strategy right now is because the IRS §7520 rate has remained at historically low levels for several years now. The October 2020 IRS §7520 rate is at its all-time low of 0.4%!




Can a donor advised fund be used to receive the charitable payments under the iCLAT?


Yes. In fact, this is how many iCLATs are intentionally structured. By having a donor advised fund receive part or all of the charitable payments, the donor (and his or her applicable family members) can retain even more control over the timing of the ultimate grant-making of the charitable dollars to charity, as well as greater anonymity - if desired.




Can I serve as the trustee of my own iCLAT?


Yes, absolutely! With an iCLAT, there are no restrictions on who can serve as a trustee. This is because an iCLAT is not an estate tax savings tool and, therefore, IRC section 2036 is not a concern. The iCLAT assets will always be included in the grantor's "gross estate" for estate tax purposes if he or she dies during the term of the iCLAT. Since the estate tax unified credit applicable exemption amount for 2020 is $11,580,000 per spouse (indexed for inflation through December 31, 2025 and thereafter, scheduled to be approximately $6 million per spouse), the automatic inclusion of the iCLAT assets in the gross estate is not a problem for over 99% of the U.S. population. Therefore, the typical limitations on who can serve as a trustee of tradtional "wealth transfer" CLT are simply NOT applicable with an iCLAT.

Again, since there no trustee limitations you can name yourself, your spouse, a child, a bank/trust company, or any other third party as trustee. This allows for the maximum level of planning flexibility when customizing an iCLAT for a particular individual.




Do the annual charitable distributions from the iCLAT have to be a fixed amount?


No, however, the vast majority of iCLATs are set up with a fixed annual charitable distribution stream to charity. The IRS does allow increasing annual payments based on a set percentage each year, pursuant to treasury regulations and IRS rulings. For example, an iCLAT can have payments increase at a set percentage of 20% each year. Furthermore, IRS Rev. Proc. 2007-43 provides additional IRS authority for an iCLAT's charitable distribution structure to be based on a more flexible increasing annuity, such as fixed payments for a term of years, followed by one or more increasing balloon type charitable distributions.




Do iCLATs have a "required" minimum or maximum number of years for IRS purposes?


No, not really. The only "practical" limitation is that the of an iCLAT has to be at least 2 years, which is not really a meaningful limitation at all. There is NO maximum number of years for the term of years for an iCLAT.




Do I have to designate a specific charity to receive all the payments from the iCLAT, or can I change them from year to year?


Unlike traditional charitable lead trusts, there are no restrictions on your ability to change the recipient charities that receive the annual payments from the iCLAT. As noted previously, you can also have the charitable lead trust payments be distributed directly to a donor advised fund or private foundation to retain even more flexibility regarding the timing of when the payments can be received by the ultimate public charity.




Can my church or other place of worship receive charitable distributions from an iCLAT?


Yes. Part or all of the annual charitable payments can be made directly to your church or other place of worship. Many people look to make their ongoing tithes and offerings directly from their iCLAT. This is allowed because, for purposes of the charitable income tax deduction under 170(c) of the Internal Revenue Code, contributions to churches and other places of worship are treated the same as those made directly to a non-profit organization that qualifies as a "public charity" for purposes of 501(c) of the Internal Revenue Code.




Why are iCLATs considered "simpler" than traditional charitable lead annuity trusts?


iCLATs are simpler because they only have one purpose - saving INCOME TAXES in the current year! iCLATs have absolutely nothing to do with saving estate taxes, gift taxes and GST taxes, which is the primary goal of almost all traditonal "wealth transfer" charitable lead trusts. As a result, there are fewer restrictions and potential pitfalls with iCLATs, compared to traditional CLTs. The singular income-tax-savings-focus of an iCLAT means that is easier to explain to the client/donor and all of his/her professional advisors. Moreover, it is easier to administer each year over its term interest. Finally, because of the reviersionary interest of an iCLAT, there is no taxable gift or gift tax return (Form 709) filing requirement with an iCLAT. Because of its simplicity, most iCLATs can be considered, drafted and fully funded in a matter of 3 to 4 weeks, not months (or years), which is often the case with traditional CLTs. As a result, iCLATs cost much LESS to establish and administer than traditional CLTs.




What does the "i" in the name iCLAT stand for?


The "i" stands for two things: 1. "i"ncome tax savings ( not estate tax savings) from recurring annual gifts to charity. 2. The "i" also stands for the DONOR/CLIENT from his or her point of view. From a planning perspective, an iCLAT is 100% focused on the DONOR/CLIENT, not on the future needs of a spouse, children, and/or grandchildren. This planning focus on the DONOR/CLIENT's current income tax savings objectives, and NOT on future unknown events (like the death of the DONOR/CLIENT and estate taxes), means that an iCLAT is much easier to explain and understand, particularly compared to other common charitable planning strategies.




Is the name "iCLAT" simply another name for a "reversionary" charitable lead annuity trust?


Yes. For both IRS and applicable state law purposes, an "iCLAT" is commonly referred to as a "reversionary" charitable lead annuity trust, which is taxed as a "grantor trust" for federal income tax purposes. Reversionary charitable lead trusts have been around for 40+ years and are well-established tools in the charitable planned giving world. They are the lesser-known type of charitable lead trust primarily because they do not provide any estate tax savings benefits - BY DESIGN!




Do the iCLAT's annual charitable distributions have to be made to the same charity each year?


No, not at all. An iCLAT can be designed to split the annual charitable distributions among 2, 3, 4 or more different charities. The grantor of the iCLAT can also design the trust that so that recipient charities can change each year. Finally, the iCLAT can also make part or all of its annual charitable distributions to his or her donor advised fund or even to a private foundation.




Why is the "IMMEDIATE" charitable income tax deduction generated by an iCLAT so large in comparison to the SUM of all the iCLAT's annual distributions to charity over its entire term?


The continued historically low IRS 7520 interest rate is why an iCLAT generates such a large IMMEDIATE charitable income tax deduction in the current year. This is because the charitable deduction is equal to the "present value" of an iCLAT's annual charitable distributions. The present value of any payment stream will always be larger the lower the interest rate used for the calcultation. The IRS 7520 interest rate is released every month by the IRS, and the current rate for September 2020 is at an all-time low of 0.4%! Accordingly, the IMMEDIATE charitable tax deductions generated by iCLATs have never been greater than they are RIGHT NOW! See the chart on our home page to see the unprecedentedly large IMMEDIATE charitable deductions and resulting income tax savings.




How is the income earned by the assets owned by the iCLAT taxed during the term of the trust?


Since all iCLATs are "grantor trusts" for federal income tax purposes, all the income (interest, dividends, rents, capital gains, royalties, etc.) from the assets owned the iCLAT are taxed to the grantor (creator of the iCLAT) and reported on the grantor's income tax return. Conversely, any losses incurred by the iCLAT assets are reported directly on the grantor's income tax return as well. See sections 671 (grantor trust treatment) and 672 (reversionary interest trigger for grantor trust status) of the Internal Revenue Code for the authority for this tax treatment.




What about state income tax savings?  Will the large IMMEDIATE charitable deduction generated by an iCLAT also save taxes on my state income tax return?


YES, but it depends on the state where you live. Not all the states that have an additional state income tax allow for a charitable deduction at the state level. For example, Massachusetts, Pennsylvania, Illinois and New Jersey, which all have an additional income tax at the state level do NOT have a corresponding charitable deduction at the state level. However, the good news is that most do! The following five states will generate the great amount of additional income taxes at the state level: California, Minnesota, New York, Oregon and Wisconsin. Click here for a map with a complete listing of all the states where an iCLAT will generate additional income tax savings at the state level.




Will you communicate with my current professional advisors?


ABSOLUTELY! In fact, that is standard procedure for us. During our typical intake process, we ask if you have a trusted professional advisor such as a financial planner, accountant and/or an attorney. If you do, then we will regularly communicate with one or more of your advisors throughout the engagement. We always welcome and encourage your advisor(s) to get involved as early as possible. Since the iCLAT trust instrument is a legal document, we will forward the document to your current estate planning attorney - BEFORE it is signed by you. Also, since all iCLATs need to set up a new bank account or investment account, our team will naturally be communicating with your current financial planner or banker during the process as well.




What is the minimum initial funding amount that is necessary for a particular iCLAT?


This is one of the most common and important questions that we receive once an individual (or his or her advisor) takes a closer look at the iCLAT. At some point during his or her review, the person (or their advisor) will say something like this, "Ok, I get it now. I understand that I'll get a huge upfront charitable deduction if I do an iCLAT, but what do I have to put into the iCLAT?" Or as one person asked, "So....what is the smallest amount that I have to put into this thing?" Well, good news. The simple answer is provided directly in the Treasury Regulations (Treas Reg. §1.170A-6(c)(3)(iii) and Example 1. In general terms, the iCLAT needs to be funded with assets having a total value that is at least equal to the value of the charitable deduction that will be generated in year 1. For example, a 10 year iCLAT created in May 2020 which distributes $25,000 on an annual basis will generate an immediate year 1 charitable deduction of $241,945. Well, there is your answer for the absolute minimum value of assets that need to be initially funded in this hypothetical iCLAT. In practice, it is rare and somewhat unnecessary for someone use this absolute minimum funding amount, for reasons covered in several other FAQs. Rather, it would be more advisable to use the sum total of the iCLATs charitable payments plus at least a 5% cushion amount to serve as a guide as the appropriate minimal funding amount. For the above example (total of $250,000 to be distributed to chartiy over its 10 year term), depending on several factors, it would be advisable to fund the iCLAT with as little as $275,000 in assets.





 

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