Charitable Lead Annuity Trust

How a CLAT works

You establish a charitable lead annuity trust and contribute appreciated stock to it. The trust — not you — owns the stock. The trust sells the stock inside the trust wrapper and reinvests the proceeds in a diversified portfolio. Because the trust is the seller, not you, the capital gains tax from the sale is assessed at the trust level, not your personal level. Trust tax rates on capital gains are generally high, which is one reason CLATs are most beneficial when structured thoughtfully.

For a fixed term (commonly 10–20 years), the trust makes annuity payments to one or more qualified charities. The size of these payments is set at the outset. When the trust term ends, the remaining assets — whatever has grown beyond the annuity payments — pass to your designated beneficiaries, typically children or a family trust.

In the year you fund the CLAT, you receive an upfront charitable income tax deduction equal to the present value of the charitable annuity payments over the trust term. This deduction offsets your ordinary income — including RSU vesting income — in the year of funding.

Why "lead" and "annuity"?

"Lead" refers to the fact that the charity receives payments first (the "lead" interest), with your heirs receiving the remainder later. This distinguishes a CLAT from a Charitable Remainder Trust (CRT), where the donor receives income first and the charity receives the remainder. "Annuity" refers to the fixed payment structure — the charity receives a fixed dollar amount each year regardless of trust performance, unlike a unitrust structure where payments fluctuate with portfolio value.

The dual benefit: reduction and offset

This is the strategy that appears in both the concentrated stock reduction and tax offset columns — because it genuinely does both. On the reduction side, the concentrated position is sold inside the trust, and the proceeds are diversified. On the offset side, the present value of the charitable annuity generates an immediate income tax deduction that can be used to offset the same year's RSU vesting income or other ordinary income.

The deduction is not unlimited — it is capped at 30% of AGI for contributions of appreciated property, with a 5-year carryforward for any excess. For a large vesting event, the CLAT deduction may only partially offset income in year one, with the remainder carrying forward.

Who this is appropriate for

CLATs require genuine philanthropic intent. The charity receives real money — this is not a paper deduction. If you have charitable giving goals that align with the annuity payment size and term, a CLAT can be highly efficient. If your primary goal is the tax benefit with minimal charitable intent, a Donor-Advised Fund (simpler, more flexible) or one of the other concentrated stock strategies is a better fit.

Estate planning motivation also matters. The remainder passing to heirs at trust termination is the estate planning benefit. If the trust's assets grow faster than the IRS's assumed hurdle rate (the §7520 rate), the "excess" growth passes to heirs estate-tax free. In a low interest rate environment, this arbitrage is particularly powerful.

Key risks and limitations

The irrevocable nature of the trust is the primary limitation. Once assets are contributed, you cannot retrieve them. The annuity payments to charity are contractually obligated regardless of investment performance. If the portfolio underperforms, the trust may be depleted before the term ends — leaving nothing for heirs and potentially triggering excise taxes. Careful modeling of investment return assumptions against the annuity obligation is essential before funding.