The Tax Eraser: Charitable Lead Annuity Trusts (CLAT)
The Tax Eraser: Charitable Lead Annuity Trusts (CLAT)
Turning a massive tax bill into a family legacy. How to get an upfront tax deduction today by promising to pay charity later, while keeping the upside for your heirs.
Executive Summary
- The Scenario: You just sold your business or crypto and have a $5M taxable gain this year. Facing a $2M federal/state tax bill is painful. You need a massive deduction now.
- The Solution (Grantor CLAT): You put assets into a CLAT. You get an immediate income tax deduction (equal to the present value of payments to charity). This wipes out your current tax liability.
- The “Lead” vs. “Remainder”: Unlike a standard trust, Charity gets the income first (the “Lead” interest) for a set term (e.g., 20 years). Your children get whatever is left (the “Remainder”) at the end. If the trust investments outperform the IRS interest rate (Hurdle Rate), that excess growth passes to your kids tax-free.
The “Shark-Fin” Strategy
Optimization: Instead of paying charity equal amounts every year, you structure the payments to be tiny in the beginning and huge at the end (like a Shark Fin shape). This keeps more money in the trust longer to compound, maximizing the final payout to your heirs.
Mechanic: Wiping Out the Tax Bill
Upfront Ded.
Reduces AGI
Charity 1st
Lead Interest
Heirs 2nd
Remainder Interest
Phantom Inc
Future Tax Risk
Simulation: $2M Windfall Tax Event (Pay IRS vs. Fund CLAT)
Wealth Distribution after 20 Years
| Feature | Charitable Remainder Trust (CRT) | Charitable Lead Trust (CLAT) |
|---|---|---|
| First Payee | You (Income Stream) | Charity (Income Stream) |
| Final Payee | Charity (You lose principal) | Your Heirs (You keep principal) |
| Goal | Income for Life | Legacy Transfer & Tax Deduction |
“A CLAT is effectively a loan from your children to your favorite charity. The charity gets the interest (income), but your children get the principal back—plus all the investment growth—at the end.”
Essential Resources
INTERNAL
BMT Playbooks