An "iCLAT" is a specific type of trust that makes ongoing annual charitable distributions for a set term of years, and then at the end of the term distributes the remaining trust assets back the person who created the iCLAT (i.e. the "grantor"). In technical terms, an iCLAT is known as a “reversionary" charitable lead annuity trust that is designed to be a grantor trust for federal income tax purposes. It is the "reversionary" aspect of the iCLAT which makes it unique from a traditional charitable lead trust ("CLT"). Unlike traditional CLTs, the sole purpose of an iCLAT is to save income taxes, not estate taxes. As a result, an iCLAT is much easier to explain, establish and administer in comparison to traditional CLTs, which are almost always primarily established to save future estate taxes.
For state law purposes, an iCLAT is an irrevocable trust which will simply terminate after its specified term of years. Importantly, an iCLAT will not negatively impact the grantor's current estate planning documents (last will & testament, revocable living trust, etc.) A very common question asked is what happens if the grantor dies during the term of the iCLAT. All iCLAT trust documents contain an important provision which specifies how the remaining assets are to be distributed at the end of the term if the grantor is not living at such time. Generally, iCLAT will simply provide that the remaining assets are to be distributed to estate of the grantor, or if applicable, to his or her revocable living trust. Additional info on this common question can be found on our FAQs page.
How does an iCLAT work? Or, said another way, how does an iCLAT accelerate income tax savings from future charitable gifts to the current year? Two words . . . "present value." The person who establishes an iCLAT (a/k/a the grantor) is entitled to a current year charitable income tax that is equal to the "present value" of the annual payments to charity over the specified term of years for the iCLAT. By way of example, an iCLAT established in January 2020 that distributes $20,000 to charity for a period of 10 years will generate a current 2020 charitable income tax deduction of $179,652! This immediate charitable deduction is equal to 90% of the total $200,000 sum to be distributed to charity over the 10 year term of this iCLAT. The 30%/20% AGI limitations will apply to the grantor's ability to claim this large accelerated charitable income tax deduction in the current year. Any unused charitable income tax deduction will be carried forward for the next 5 years. Since an iCLAT qualifies as a charitable lead annuity trust that happens to be treated as a "grantor trust" for income tax purposes, the iCLAT will generate a current-year charitable income tax deduction for the grantor (see section 170(f)(2)(B) of the Internal Revenue Code and section 1.170A-6(c)(3) of the U.S. Treasury Regulations).
The term of years for an iCLAT can be as short 2 years, and as long as the grantor desires. There is no limit on the length of the term of an iCLAT. Practically speaking however, the term of years for most iCLATs are usually between 5 and 20 years. In all cases, the specific length of an iCLAT is a significant factor that is discussed in order to properly customize one's iCLAT to produce the ideal "accelerated" charitable income tax deduction in the current year for the grantor, based on his or her specific income tax situation. Additional info is point can be found on our FAQs page.
Who can most benefit from an iCLAT?
The iCLAT will work best, by generating the greatest amount of "immediate" income tax savings, for those persons who:
#1: Currently* give between $10,000 and $100,000 per year to one or more charitable organizations (including to their place of worship or donor advised fund);
#2(a): have an "ordinary income" event of $250,000 or more in the
#2(b): have a high current level of income but plan to retire (or their income will otherwise end) within the next 3 years.
* NOTE: If you do not currently make annual charitable gifts between $10,000 and $100,000 per year, then the iCLAT will also work just as well for you if you PLAN TO START making annual gifts at such level on a regular basis in the future.
Why is 2020 the ideal year to consider an iCLAT?
4 KEY REASONS WHY 2020 IS
THE IDEAL YEAR TO ESTABLISH AN iCLAT:
As a result of the DOUBLING OF THE STANDARD DEDUCTION, which went into effect on Jan 1, 2018, it is now harder than ever to receive any income tax savings from charitable gifts under $12,500/yr. for single persons and $25,000/yr. married persons.
The IRS 7520 interest rate remains at historically low levels (1.2 % is the April 2020 rate), which allows all CLTs to generate a very large "immediate" charitable income tax deduction in the current year.
The realistic possibility of increased income tax rates and changes to the charitable deduction in the near future
The overall limitation on itemized deductions for high-income individuals, the so-called "Pease Limitation," is currently suspended (until December 2025). As a result, an iCLAT's large accelerated charitable deduction will produce significantly more income tax savings now compared to prior years.