Charitable Lead Annuity Trust (CLAT) for HNW Wealth Transfer

A charitable lead annuity trust is the mirror image of a charitable remainder trust. Charity gets the income first — a fixed annuity for a defined term. Your heirs get whatever is left at the end. Structure it as a "zeroed-out" CLAT and you transfer all above-hurdle investment growth to heirs with zero gift tax and zero use of your $15M lifetime exemption, while making a real multi-year charitable commitment. At the current §7520 rate of 5.00% (May 2026), any net return above 5% inside the trust passes to heirs estate-and-gift-tax free. Here's how it works.

How a CLAT works

You transfer assets — typically cash or publicly traded securities expected to appreciate — to an irrevocable charitable lead annuity trust. The trust is governed by IRC § 2522(c)(2)(B) for gift tax and § 2055(e)(2)(B) for estate tax if funded at death.¹ Each year, the trust pays a fixed annuity to one or more qualified charities you named at founding. At the end of the trust term, the remaining assets pass outright to your designated heirs — typically children or a dynasty trust.

Three things happen at funding:

• Gift/estate tax deduction. The gift tax value of the transfer is reduced by the present value of the charity's annuity stream, discounted at the IRS §7520 rate (5.00% for May 2026, per IRS Rev. Rul. 2026-9).² Set the annuity so the PV of charity's stream equals 100% of the contribution — a "zeroed-out" CLAT — and the taxable gift is $0. No gift tax owed. No exemption used.
• Charitable commitment. The trust irrevocably directs a defined annual dollar amount to charity for the full term. This is real charitable giving — not a future pledge that you can revoke.
• Growth transfer. If the trust's actual return exceeds the §7520 hurdle rate, the surplus accumulates inside the trust and passes to heirs at term end — with no additional gift, estate, or GST tax cost.

CLAT vs. CLUT: which structure

For wealth transfer, the CLAT is almost always the preferred structure. The fixed annuity means all above-hurdle growth goes to heirs — the charity doesn't "share" in exceptional performance years.

Grantor vs. non-grantor CLAT

This structural choice determines who pays income taxes during the trust term and whether you receive an income tax deduction at funding.

• Non-grantor CLAT (standard for wealth transfer). The trust is a separate taxpayer. It pays income tax on trust income — but receives an unlimited charitable deduction under IRC § 642(c)(1) for amounts of gross income distributed to charity.³ In practice, the trust's taxable income is only the net amount earned above the annuity payments to charity. You do not get an income tax deduction at funding — only a gift tax reduction (to zero in a zeroed-out structure).
• Grantor CLAT (income-tax deduction strategy). You are treated as the trust's owner for income tax purposes. You receive an upfront income tax deduction under IRC § 170(f)(2)(B) equal to the PV of the charity's annuity interest — subject to the 30%-of-AGI ceiling for appreciated property and 60%-of-AGI ceiling for cash, with a 5-year carryforward.⁴ In exchange, you pay income tax on all trust income during the term. Because you absorb the trust's tax liability, the heirs' share compounds without the tax drag — making the grantor CLAT a back-door gift mechanism on top of the above-hurdle transfer. OBBBA's 2/37 deduction limitation reduces the effective income tax benefit to 35 cents per dollar for 37%-bracket filers; the 0.5%-of-AGI floor reduces the deductible amount by a small amount at high income levels.

The zeroed-out CLAT: wealth transfer without using exemption

At a §7520 rate of 5.00%, a 10-year zeroed-out CLAT requires an annual annuity payment of approximately 12.95% of the initial contribution per year. Fund $5M and you're committed to paying charity $647,500/year for 10 years — $6.47M in total charitable distributions. The trust funded with $5M growing at 8% annually ends that period worth approximately $2.5M, which passes to heirs with $0 of gift tax paid and $0 of your $15M lifetime exemption consumed.

Had you instead given that $5M directly to heirs using your lifetime gift/estate exemption, you'd use $5M of your $15M exemption. The zeroed-out CLAT achieves a similar transfer while (a) making $6.47M in real charitable gifts, (b) preserving your full $15M exemption for other assets, and (c) paying zero gift tax. The trade-off: charity receives substantially all of the income; heirs only receive above-hurdle growth at the end.

Zeroed-out CLAT wealth transfer calculator

Model a non-grantor zeroed-out CLAT. Enter the initial contribution, trust term, and assumed annual return. The calculator auto-derives the fixed annuity that zeros out the taxable gift at the §7520 rate of 5.00% (May 2026, IRS Rev. Rul. 2026-9) and projects the estimated terminal value to heirs under different return scenarios.

CLAT vs. GRAT: which wealth transfer tool fits

A zeroed-out CLAT and a zeroed-out GRAT use identical math: both transfer all above-hurdle investment growth to heirs tax-free. The structural differences determine which is appropriate.

CLAT vs. CRT: the charitable trust choice

Scenarios where a CLAT fits $5M–$50M households

1. Strong expected returns with charitable intent

If a specific allocation — growth equity, a private equity sleeve, or a concentrated publicly traded position you're ready to diversify — is expected to return 8–12%, and you have genuine charitable goals, a CLAT captures the above-hurdle compounding for heirs while funding the charity. On a $5M allocation returning 9% for 10 years inside a zeroed-out CLAT (§7520 = 5.00%), heirs receive approximately $3.1M — using $0 of exemption — while charity receives $6.47M over the term.

2. Grantor CLAT in a high-income year

In a business-exit year where ordinary income is unusually high, a grantor CLAT provides an upfront income tax deduction equal to the PV of the charity's annuity interest (the full initial contribution in a zeroed-out CLAT). On a $5M cash contribution with $20M of business-exit income, the 60%-of-AGI ceiling allows the full $5M deduction in Year 1, reducing federal taxes by up to $1.75M. You then pay income taxes on trust income during the term — but the up-front deduction typically more than offsets the drag, especially in early years when large annuity payments to charity generate significant §642(c)-equivalent relief.

3. Dynasty trust seeding with GST efficiency

Unlike a zeroed-out GRAT (where the remainder value at funding is approximately zero, making GST allocation wasteful), a zeroed-out CLAT has a non-zero present value remainder that can receive a GST exemption allocation at funding. This locks in the exemption while assets are at a lower value, allowing multi-generational transfer free of GST tax. Work with an estate attorney on the timing and amount of GST allocation.

4. Testamentary CLAT for estate reduction

A testamentary CLAT is established at death via your trust or will. Under § 2055(e)(2)(B), the estate receives a charitable deduction equal to the PV of the charity's annuity stream, reducing the taxable estate. This is most useful when your estate exceeds the $15M OBBBA exemption, or if you reside in a state with a lower threshold — Oregon ($1M), Massachusetts ($2M), New York ($7.35M cliff), Washington (~$3M). A $5M testamentary CLAT removes $5M from the taxable estate (zeroed-out structure) while directing significant charitable income over the trust term and passing residual growth to heirs.

Practical considerations before funding a CLAT

• Minimum practical size. Setup costs — trust drafting ($5K–$15K+), annual Form 5227 filing, and trustee fees — make CLATs impractical below roughly $1M. Most planning in the $5M–$50M range occurs at $2M+ per trust.
• Trustee selection. In a non-grantor CLAT, avoid serving as your own trustee — retained control may create §2036(a)(2) estate inclusion risk. Independent or corporate trustees are common. A fee-only wealth advisor can serve as investment advisor to the trustee without creating inclusion risk.
• Annuity sustainability. If the trust's actual return falls below the annuity payment in early years, the trust depletes faster than projected and heirs may receive nothing. Model downside scenarios carefully before committing to a payout rate.
• §7520 rate timing. The §7520 rate changes monthly with market interest rates. In a zeroed-out CLAT, a higher §7520 rate means a higher required annuity payment to charity — less advantageous for heirs in absolute terms. However, in a higher-rate environment, investment returns may also be higher, partially offsetting this. Current rate: 5.00% for May 2026.
• Annual reporting. The trust files Form 5227 (Split-Interest Trust Information Return) annually. Distributions to charities are documented; distributions to heirs at termination follow trust income tax rules under §662 and the four-tier system.
• Irrevocability. Once funded, the charitable commitment cannot be reduced or revoked. Fully model the annuity obligation across a range of return assumptions before finalizing the term and payout.

1. 26 U.S. Code § 2522 — Charitable and Similar Gifts (Gift Tax) — Cornell LII. § 2522(c)(2)(B): gift tax deduction for the charitable lead interest in a split-interest trust. Companion estate tax provision: § 2055(e)(2)(B) for testamentary CLATs.
2. IRS Section 7520 Interest Rates — IRS.gov. §7520 rate for May 2026: 5.00% per IRS Rev. Rul. 2026-9 (Internal Revenue Bulletin 2026-19). Rate is 120% of the applicable federal midterm rate, rounded to the nearest 0.2%.
3. 26 U.S. Code § 642(c) — Charitable Deduction for Trusts and Estates — Cornell LII. § 642(c)(1): amounts of gross income paid pursuant to the governing trust instrument for a charitable purpose are deductible by the trust. This is the statutory basis for the non-grantor CLT's annual charitable deduction against trust income.
4. IRS Rev. Proc. 2007-45 — Sample Inter Vivos Charitable Lead Annuity Trust Forms — IRS.gov. IRS sample trust documents for inter vivos CLATs; covers grantor and non-grantor structures, § 170(f)(2)(B) income deduction requirements for grantor CLATs, 30%/60%-of-AGI limitations, and requirements for gift tax qualification under § 2522(c)(2)(B).
5. IRS Rev. Proc. 2025-32 — 2026 Tax Inflation Adjustments — IRS.gov. 2026 annual gift exclusion: $19,000 per recipient. LTCG 20% threshold: $613,700 MFJ. OBBBA permanent estate/gift/GST exemption: $15M (§2010). 5-year carryforward for charitable contribution deductions under § 170(d)(1).

Tax values reflect 2026 rules. §7520 rate 5.00% for May 2026 per IRS Rev. Rul. 2026-9. OBBBA (July 2025): $15M permanent estate/gift/GST exemption; OBBBA 0.5%-of-AGI deduction floor and 2/37 deduction cap (35¢ effective benefit per $1) for 37%-bracket filers on all itemized deductions. Annual gift exclusion $19,000 per recipient and LTCG thresholds per IRS Rev. Proc. 2025-32. Consult a qualified estate attorney, CPA, and fee-only wealth advisor before creating a CLAT.