Charitable Lead Annuity Trusts: How High-Income Expats Reduce Taxes and Transfer Wealth

High-income U.S. taxpayers often seek ways to protect their wealth, reduce tax exposure, and transfer assets efficiently to the next generation. Those goals become even more important when your income increases, your portfolio grows, or you hold assets in multiple countries. Charitable Lead Annuity Trusts help you meet those goals.

What Is a Charitable Lead Annuity Trust?

A Charitable Lead Annuity Trust (CLAT) is an irrevocable trust that sends fixed annual payments to a qualified charitable organization for a set number of years. After the charitable term ends, the remaining assets pass to the beneficiaries you name, such as your children or other family members. For high-income U.S. taxpayers, including Americans living abroad, a CLAT offers structure, predictability, and meaningful long-term planning benefits that reduce U.S. estate and gift tax exposure.

The central idea is simple. You support charitable work for a defined period, and your beneficiary receives the remaining value in a tax-efficient way.

Key features include:

• A fixed annual payment to a qualified charitable organization
• A trust term set in advance
• Remaining assets distributed to your beneficiaries
• Potential U.S. estate and gift tax advantages

A CLAT fits well when you want clear charitable commitments and a structured way to shift future asset growth to the next generation.

How Does a Charitable Lead Annuity Trust Work?

You begin by transferring assets such as cash, publicly traded stock, or other property into the trust. Once funded, the trustee manages the assets and pays a fixed annuity to the chosen charitable organization each year. The payment amount doesn’t change, even if the trust’s value rises or falls.

When the charitable term ends, the trust distributes the remaining assets to your beneficiaries. If the trust assets grow faster than the required annual payments, more value is left for your heirs at the end of the term.

Why Does CLAT Appeal to High-Income Expats?

U.S. estate and gift taxes apply to U.S. citizens and domiciliaries, including those who live abroad. Many high-income individuals seek ways to reduce the tax cost of passing wealth to the next generation. A CLAT helps in several ways.

1. It Helps Reduce U.S. Estate Taxes

A CLAT shifts assets out of your taxable estate at a discounted value. When you fund the trust, the IRS requires you to subtract the present value of the payments going to charity. That charitable deduction reduces the size of the taxable gift. With the right terms, you can “zero out” the gift so the projected charitable payments offset the full amount you transferred.

Once the trust is funded, any growth above the IRS’s assumed rate occurs outside your estate. That excess value eventually passes to your beneficiaries after the charitable term ends. This structure lowers your estate tax exposure and lets you move more wealth to your family at a reduced tax cost.

2. It Creates Predictable Annual Giving

A CLAT provides fixed yearly support to qualified charitable organizations for the entire trust term. That consistency helps you plan your giving instead of relying on year-to-year decisions. It also provides stability if your income varies or if you live abroad and want to maintain support for U.S. charities.

Many taxpayers pair a CLAT with a donor-advised fund. That option gives you flexibility to update your charitable preferences over time while keeping the trust’s required payments on schedule. It’s useful if you relocate or support multiple organizations across different years.

3. It Supports Efficient Wealth Transfer to the Family

A CLAT transfers the remaining assets to your beneficiaries once the charitable period ends. If the trust’s investments grow faster than the IRS hurdle rate, that extra value passes to your heirs at a reduced transfer-tax cost. You move future appreciation out of your estate while meeting your charitable goals during the term.

4. It Works With a Wide Range of Assets

You can fund a CLAT with cash, marketable securities, or other assets that offer long-term appreciation. Many people use a CLAT during years of higher-than-usual income, after selling a business, or when repositioning a portfolio. Americans living abroad often rely on U.S.-situs assets or investment portfolios to simplify compliance while still taking full advantage of the strategy. Foreign assets may require added planning because of local property rules, so most expats coordinate those assets separately.

5. It Aligns With Long-Term Planning Goals

A CLAT brings charitable giving, tax planning, and family legacy planning into one structure. You commit to supporting a charity for a defined period while creating a tax-efficient path to transfer assets to your beneficiary. Because the terms are set from the start, the trust continues to operate consistently even when income, markets, or residency change. This level of clarity and predictability appeals to taxpayers who want a stable, long-term solution rather than a series of individual decisions each year.

What is the 7520 Rate in CLAT Planning?

The IRS 7520 rate determines the assumed interest rate used to value the charitable interest. Lower rates make CLATs more powerful because more appreciation can pass to the remainder beneficiaries.

When Do CLATs Produce the Best Results?

CLATs often perform well when:

• The 7520 rate is low
• The trust’s assets outperform the hurdle rate
• You contribute undervalued assets or assets primed for growth

These conditions increase the remainder left for your heirs.

A Practical Example of How CLAT Works:

Assume you contribute $1,000,000 to a CLAT that lasts for 10 years.

To determine the required annual payment, the IRS uses the 7520 rate and a valuation factor from Table B. For December 2025, the present-value factor for a 10-year annuity at 4.6% is 7.874.

To “zero out” the gift, the present value of the charitable payments must equal the amount you contributed. So the trust divides the $1,000,000 contribution by 7.874:

1,000,000​/ 7.874 = 127,000

That means the trust pays roughly 12.7% of the trust value each year (about $127,000) to charity during the 10-year term.

If the CLAT assets grow at a modest 7% annually, here’s what will happen.

Charitable Benefits

Over the 10-year term, the charity receives $1,270,000 in steady annual support. Because the present value of these payments matches the full amount you contributed, the IRS treats the entire transfer as a charitable lead interest for valuation purposes. That means you receive a $1,000,000 gift-tax charitable deduction at the time you fund the trust.

Wealth Transfer Benefits

A zeroed-out CLAT produces a taxable gift of $0, so you do not owe gift tax, and you preserve your lifetime exemption for future planning. While the trust makes its annual payments to charity, the remaining assets stay invested. If the CLAT earns a modest 7% return, it’s projected to hold $420,000 to $480,000 at the end of the term. That remainder passes to your beneficiaries once the charitable commitment ends. Because the IRS assumes a 4.6% growth rate, any actual return above that amount shifts to your family in a tax-efficient way and falls outside your taxable estate.

Income Tax Benefits

The income-tax result depends on the type of CLAT you choose.

With a grantor CLAT, you receive an immediate income-tax deduction equal to the present value of the charitable payments (in this example, $1,000,000). In exchange, you report and pay income tax on the trust’s earnings each year. This works well when you expect higher-than-usual taxable income and want a large upfront deduction.

A non-grantor CLAT does not provide an upfront income-tax deduction. Instead, the trust deducts its annual charitable payment, which often reduces or eliminates taxable income at the trust level. This structure typically aligns better with long-term estate and gift planning because it focuses on removing future growth from your taxable estate while keeping trust-level income neutral.

Risks and Limitations You Should Understand

1. CLATs Require an Irrevocable Commitment

A Charitable Lead Annuity Trust cannot be undone once you fund it. You give up control of the assets, and the trust must follow the terms you established at the start. This structure supports long-term planning, but it also limits flexibility, so you must feel confident about the assets you contribute and the charitable term you select.

2. Investment Performance Shapes the Remainder for Heirs

Poor investment performance reduces the amount available for your beneficiaries at the end of the trust term. The annual charitable payment remains fixed, so weaker returns shift more of the trust’s value toward fulfilling the annuity obligation and less toward the remainder beneficiaries.

3. Charitable Beneficiaries Typically Cannot Be Changed

Most CLATs do not allow you to replace the charitable beneficiary once the trust is established. If you want flexibility, naming a donor-advised fund as the lead beneficiary gives you the ability to recommend grants to different charities over time while keeping the trust compliant with U.S. tax rules.

4. Additional Reporting May Apply

A CLAT created under U.S. law with a U.S. trustee generally follows standard domestic reporting rules. However, if the trust involves foreign trustees, foreign accounts, or foreign administration, you may trigger additional U.S. reporting requirements such as Forms 3520/3520-A, Form 8938, or FBAR, along with potential local tax considerations in your country of residence.

Frequently Asked Questions

Does a CLAT reduce income taxes or estate taxes?

A CLAT can address both, depending on its structure. Grantor CLATs provide an upfront income tax deduction, while non-grantor CLATs focus on long-term estate and gift tax savings. Choosing the right design depends on whether your immediate priority is lowering taxable income or shifting assets outside your taxable estate.

Can I still benefit from the trust during the charitable term?

No. A CLAT directs payments only to qualified charities during its term. You cannot receive income from the trust until the charitable obligation ends, and you cannot reclaim contributed assets.

Do I have to pay gift tax or use the gift exemption when I set up the trust?

Most CLATs are structured so that the value of the charitable payments offsets the value of the gift, which can reduce or eliminate the need to use your gift tax exemption. This is called a “zeroed-out” CLAT and allows you to transfer future appreciation to your beneficiaries with little or no gift tax cost. Your advisor can calculate the present value of the charitable interest to determine the impact on your exemption and overall estate plan.

What happens if the trust investments underperform?

The trust must still make the fixed annual payments, even in years when investment performance falls short. Underperformance reduces the amount available for your beneficiaries at the end of the term. Careful asset selection and consistent management help reduce this risk.

Who should consider using a Charitable Lead Annuity Trust?

A CLAT works best for high-income taxpayers who want a structured way to support charitable causes while managing estate and gift tax exposure. It also fits well if you expect strong long-term growth from the assets you plan to contribute. Many Americans, including those living abroad, use CLATs to balance philanthropy and wealth transfer planning.

Should a CLAT Be Part of Your Planning?

If you want clarity on whether a Charitable Lead Annuity Trust fits your charitable or estate planning objectives, our team can help you evaluate the strategy through our Proactive Planning service.

Request a FREE consultation here.