The Philanthropic Arbitrage: Charitable Lead Annuity Trusts (CLAT)
The Philanthropic Arbitrage: Charitable Lead Annuity Trusts (CLAT)
Facing a massive tax bill from a business exit? How to use a “Shark Fin” CLAT to wipe out this year’s income tax, support your favorite cause, and still pass the principal to your heirs tax-free.
Executive Summary
- The Scenario: You just sold your company for $10M and face a $3M tax bill this year. You want to eliminate this tax, but you don’t want to give your money away forever (like with a direct donation).
- The Solution (Grantor CLAT): You put $10M into a CLAT. The trust pays an annuity to a charity for a set term (e.g., 20 years). Because you are the “Grantor,” you get a **massive upfront tax deduction** (up to 30% of AGI) in Year 1, effectively wiping out your income tax bill.
- The Exit (The Remainder): After the 20-year term ends and the charity has been paid, **whatever is left in the trust goes to your children tax-free.** If the trust investments outperform the IRS Hurdle Rate (Section 7520), your family keeps the arbitrage.
The “Shark Fin” Strategy
Optimization: A standard CLAT pays the charity equally every year. A **”Shark Fin” CLAT** backloads the payments. It pays the charity almost nothing ($100) for 19 years, allowing the principal to grow aggressively inside the trust. Then, in Year 20, it pays a huge balloon payment to the charity.
👉 Result: More compound growth stays inside the trust for the family, maximizing the wealth transfer to heirs.
Mechanic: Renting the Asset to Charity
Simulation: $5M Business Sale (No Plan vs. Shark Fin CLAT)
| Feature | CRT (Charitable Remainder Trust) | CLAT (Charitable Lead Trust) |
|---|---|---|
| Who gets Income? | You (Retirement Income) | Charity (Lead Interest) |
| Who gets Remainder? | Charity | Your Heirs (Tax-Free) |
| Primary Goal | Income Security | Tax Deduction & Wealth Transfer |
With a CLAT, you are essentially telling the IRS: ‘I will give this money to charity for a while, so don’t tax me.’ But by investing wisely, you ensure that the ‘while’ is temporary, and the ‘wealth’ returns to your family permanently.