Testamentary Charitable Lead Trusts
A Testamentary Charitable Lead Annuity Trust (“T-CLAT”) is a Charitable Lead Trust (“CLT”) that is established in a will or will substitute, i.e. a revocable trust, which establishes a CLT upon the death of a Testator or Settlor. Unlike lifetime CLTs, which are irrevocable, the terms of a T-CLAT are revocable during the Testator or Settlor’s lifetime, because T-CLATs are created in a revocable testamentary document. In addition, the Income Period of the T-CLAT is usually set up for a term of years, because it is easier to use to use a Formula Clause to “zero-out” the gift to the non-charitable Remainder Beneficiary.
As with lifetime Charitable Lead Trusts, the value of the taxable gift for a T-CLAT is the value of the Remainder Interest following Initial Term (as calculated under AFR rates). One of the primary purposes of a T-CLAT is to “zero out” the value of the assets contributed to the T-CLAT for Estate Tax purposes. In order to “zero-out” the value of assets contributed to the T-CLAT, the Settlor will use a Formula Clause, because he or she cannot predict the time of his or her death. Therefore, it is impossible to know the AFR until the Settlor or Testator dies. Formula clauses “zero out” the estate in the following two ways: 1) the Settlor selects the Initial Term of the T-CLAT, the IRS sets the AFR for the month the Settlor dies, and the formula will set the interest rate, so the value of the assets transferred to the T-CLAT for estate tax purposes will be zero; and 2) the Settlor sets the interest rate during the Initial Term, the IRS sets the AFR for the month the Settlor dies, and the formula will set the Initial Term, so the value of the assets transferred to the T-CLAT for estate tax purposes will be zero.