Are you charitably inclined? Do you expect a high income tax bill for this year because you sold your business, received a large bonus, or took a large IRA withdrawal to complete a Roth IRA conversion? If you are charitably inclined and have unusually high taxable income this year, you can create and fund a grantor Charitable Lead Annuity Trust (“CLAT”) and benefit from an immediate income tax charitable deduction to lower your personal income tax bill for this year.
What is a CLAT?
A CLAT is a type of charitable trust whereby a charity, donor advised fund, or foundation of your choosing (the “Charitable Lead Beneficiary”) receives annual payments, usually for a 10- to 20-year term. At the end of this defined period, the remaining CLAT assets are distributed to the CLAT’s non-charitable beneficiaries, who can be your descendants or trusts for your descendants’ benefit.
How do CLATs generate an income tax charitable deduction for you individually?
CLATs are not exempt from income tax. Either you as the grantor or the CLAT itself is liable for the tax on income earned by the CLAT. If you want to claim an immediate income tax charitable deduction on your personal income tax return, the CLAT must be set up as a grantor trust, so that all income generated by the CLAT during the trust term is taxable to you rather than the CLAT. This is called a grantor CLAT.
A CLAT is a grantor CLAT if the trust gives you a grantor trust power under Internal Revenue Code sections 673-677, such as the power to add a charitable beneficiary or the power of a non-disqualified person to substitute trust assets with your assets of equivalent value.
For grantor CLATs, you receive an income tax charitable deduction equal to the present value of the payments the Charitable Lead Beneficiary will receive over the CLAT term (commonly 10-20 years). If the present value of the annuity payments the Charitable Lead Beneficiary receives is equal to the initial funding amount of the grantor CLAT, you will receive an income tax charitable deduction equal to the amount you gift to the grantor CLAT.
The extent to which you can use the income tax charitable deduction in any particular year is limited to a portion of your adjusted gross income (AGI) for the year – up to 30% of AGI if the grantor CLAT is funded with appreciated assets (but only 20% of AGI if the Charitable Lead Beneficiary is a private foundation). In a high AGI year, you should be able to use the entire income tax charitable deduction that year to offset your unusually high income tax bill. If not, you can claim unused portions of the income tax charitable deduction in up to five additional carry-forward tax years.
It should be noted that you must report and pay tax on all grantor CLAT income on your individual income tax return every year during the grantor CLAT term. Because you already benefitted from the upfront income tax charitable deduction at the grantor CLAT’s inception, you will not receive any more income tax charitable deductions during the remainder of the CLAT term for the payments made to the Charitable Lead Beneficiary in subsequent years.
A CLAT may also be structured as a non-grantor CLAT. For the non-grantor CLAT, the grantor may not claim an income tax charitable deduction on their personal tax return. The CLAT is its own taxpayer and claims a charitable deduction each year equal to the payments made to the Charitable Lead Beneficiary that year. It’s important to understand that you as the grantor can only receive an income charitable tax deduction to use on your personal tax return if the CLAT is a grantor CLAT.
Isn’t it simpler to donate directly to a charity?
Yes. However, with a grantor CLAT, you can receive an income tax charitable deduction equal to the full amount you gift to the grantor CLAT yet still achieve a potential wealth transfer benefit to the next generation.
The wealth transfer benefit of CLATs is best in low interest environments and down markets. Each month, the IRS publishes a “hurdle” interest rate, called the 7520 rate. The lower the 7520 rate is, the smaller the amount that must be paid to the Charitable Lead Beneficiaries, leaving more value in the CLAT at the end of the term for your descendants. If the grantor CLAT grows at a faster rate year over year than the IRC 7520 rate at the time the grantor CLAT is funded, the grantor CLAT will transfer wealth to your children (or trusts for your children’s benefit) with no gift or estate tax cost.
For example, the IRC 7520 rate in November 2025 is 4.6%. If you set up a grantor CLAT this November and your grantor CLAT’s portfolio return outperforms 4.6% year over year, the growth in the CLAT portfolio exceeding this 4.6% hurdle will pass to your children without using your federal lifetime gift or estate tax exemption.
Can you provide an example of how a grantor CLAT works?
Let’s say you received a $3 million bonus earlier this year in addition to your $500,000 annual salary. This all counts as ordinary income and the marginal federal tax rate is 37%. After discussing with your financial advisor, tax professional, and estate planning attorney, you decide to contribute $1,000,000 to a grantor CLAT that lasts for 10 years. With a November 2025 7520 Rate of 4.6%, the grantor CLAT pays $127,000 annually to your favorite charity. Assuming average growth of 10% annually of the grantor CLAT portfolio, the result would be as follows:
- Charitable Benefits: Your favorite charity receives $1,270,000 ($127,000 per year for 10 years) and grantor CLAT assets can be distributed to the charity in kind rather than in cash.
- Wealth Transfer Benefits: Taxable gift of $0 – since the present value of the total annuity payments that the charity will receive equals $1,000,000 and qualifies for the gift tax charitable deduction, you owe no gift tax and do not need to use any of your federal lifetime gift tax exemption. At the end of 10-year grantor CLAT term, the remaining grantor CLAT assets, approximately $570,000, are distributed to trusts for your descendants per the grantor CLAT provisions without using any of your lifetime federal gift or estate exemption.
- Income Tax Benefits: Income tax charitable deduction of $1,000,000 (equal to the present value of the total annuity payments that the charity will receive) for you to use for the tax year when the grantor CLAT was created, with a 5-year carry-forward for any unused charitable deduction.
What assets should a grantor use to fund a CLAT?
CLATs can be funded with cash that’s invested for growth or with stocks or other assets with high growth potential over time.
Is the CLAT includible in my estate?
By gifting assets to a CLAT, you remove those assets from your taxable estate if you survive the CLAT term. If you pass away before the CLAT term ends, the full value of the CLAT is included in your gross estate, but your estate will be entitled to an estate tax charitable deduction for the present value of the remaining payments owed to the Charitable Lead Beneficiary.
Further Information
A grantor CLAT may help you accomplish your charitable, income tax, and estate planning goals. Contact us to learn how we can work with your tax advisor and estate planning attorney to see if a grantor CLAT makes sense for you.
Wealthspire Advisors LLC and certain of its affiliates are separately registered investment advisers. ©2025 Wealthspire
Please Note: Limitations. The achievement of any professional designation, certification, degree, or license, recognition by publications, media, or other organizations, membership in any professional organization, or any amount of prior experience or success, should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results or satisfaction if Wealthspire is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of Wealthspire Advisors by any of its clients or a third party.
Registration of an investment advisor does not imply that Wealthspire Advisors or any of its principals or employees possess a particular level of skill or training in the investment advisory business or any other business.
This material should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The information provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.
Wealthspire and its representatives do not provide legal or tax advice, and Wealthspire does not act as law, accounting, or tax firm. Services provided by Wealthspire are not intended to replace any tax, legal or accounting advice from a tax/legal/accounting professional. The services of an appropriate professional should be sought regarding your individual situation. You should not act or refrain from acting based on this content alone without first seeking advice from your tax and/or legal advisors.
Certain employees of Wealthspire may be certified public accountants or licensed to practice law. However, these employees do not provide tax, legal, or accounting services to any of clients of Wealthspire, and clients should be mindful that no attorney/client relationship is established with any of Wealthspire’s employees who are also licensed attorneys.
