Contributed by: Brian W. Sak, CFP®, CLU®, ChFC®

For high-net-worth individuals seeking to balance charitable giving with strategic wealth transfer, the Enhanced Charitable Lead Annuity Trust (eCLAT) is a powerful tool. This sophisticated strategy enables donors to make substantial contributions to charity while preserving and growing wealth for their families. By incorporating life insurance into a traditional Charitable Lead Trust (CLT), the eCLAT maximizes both philanthropic impact and family legacy.

This article explores how the eCLAT works, its benefits, and why it could be an essential part of your financial plan—particularly in light of income tax limits, interest rate dynamics, and other tax-efficient planning opportunities.

Understanding the Basics of a Charitable Lead Trust (CLT)

A Charitable Lead Trust (CLT) is an irrevocable trust that allows donors to make periodic payments (annuity payments) to a charity for a set number of years. At the end of the trust’s term, any remaining assets are transferred to designated beneficiaries, such as the donor’s family members.

Key Features of a Standard CLT:

• Charitable Giving: Provides consistent, multi-year funding to chosen charities.
• Tax Efficiency: Offers potential gift, estate, and income tax benefits.
• Wealth Preservation: Transfers remaining trust assets to heirs at a reduced tax cost.

CLTs are especially effective in high-interest-rate environments. The IRS Section 7520 rate—used to calculate the present value of charitable payments—directly impacts the tax deduction associated with the trust.

• Higher 7520 Rates: Increase the present value of charitable payments, enhancing the donor’s tax deduction.
  Example: The 7520 rate for November 2024 is 5.2%, making CLTs particularly advantageous for donors seeking to maximize deductions.

What Sets the eCLAT Apart?

The eCLAT builds on the principles of a standard CLT but incorporates life insurance for enhanced wealth transfer. This combination ensures the donor’s charitable objectives are met without diminishing their family’s financial legacy.

How the eCLAT Works:

1. Establishing the Trust: The donor creates an annuity-based CLT and funds it with income-producing assets such as cash, securities, or real estate.
2. Charitable Payments: Fixed annuity payments are made to one or more charities over a specified term (e.g., 10 or 20 years).
3. Integrating Life Insurance: A portion of the income generated by the trust is used to fund a life insurance policy, typically held in an irrevocable life insurance trust (ILIT). The policy ensures tax-free wealth transfer to heirs.
4. Distributing Remaining Assets: After the charitable term, the remaining trust assets are distributed to heirs, often with significantly reduced estate tax liability.

The integration of life insurance allows the eCLAT to "replace" or even exceed the value of the assets donated to charity, providing a unique balance of giving and wealth preservation.

Charitable Deduction Limits and 7520 Rates: Key Considerations

Income Tax Deduction Limits

Donors using an eCLAT can benefit from deductions tied to the present value of the charitable payments. These deductions are subject to IRS limits based on adjusted gross income (AGI):

• Cash Contributions: Deduct up to 60% of AGI for cash donations.
• Appreciated Assets: For assets like securities, the deduction is generally limited to 30% of AGI.
• Carryover Rules: Unused deductions can be carried forward for up to five years.
  Example: A donor with an AGI of $1,000,000 could deduct up to $600,000 in cash contributions or $300,000 in appreciated assets annually, with any excess carried forward.

The Role of 7520 Rates

The IRS Section 7520 rate influences the valuation of the charitable annuity payments and the corresponding tax deductions:

• Higher 7520 Rates: Increase the present value of the charitable interest, resulting in a larger income tax deduction. High rates are advantageous for CLTs.
• Lower 7520 Rates: Favor Charitable Remainder Trusts (CRTs), where the charity receives assets at the end of the term.

Given current 7520 rates exceeding 5%, CLTs—including the eCLAT—are particularly attractive in today’s interest rate environment.

Key Benefits of the eCLAT

Maximized Charitable Giving

• Provides consistent, multi-year funding to support causes the donor values.
• Charities benefit from predictable payments, enhancing their ability to plan.

Tax Efficiency

• Contributions to the trust can generate immediate income tax deductions, subject to IRS limits.
• Strategic use of the 7520 rate ensures the donor maximizes their tax benefits.

Enhanced Wealth Transfer

• Life insurance proceeds ensure heirs receive a tax-free inheritance, mitigating any perceived loss from the charitable donations.
• Assets remaining in the trust after the term pass to heirs with minimized estate tax exposure.

Estate Liquidity

• Life insurance provides liquidity for estate taxes and settlement costs, preserving other assets for future generations.

Comparing CLTs and CRTs: Why eCLAT Stands Out

Understanding when to choose a CLT (or eCLAT) over a Charitable Remainder Trust (CRT) is crucial.

• CLT (eCLAT): More attractive when interest rates are high, as the charitable payments’ present value—and therefore the tax deduction—is increased.
• CRT: More effective in low-interest-rate environments, where the value of the remainder interest to charity is higher.

By incorporating life insurance, the eCLAT amplifies the advantages of the traditional CLT, offering greater flexibility and impact.

Who Should Consider an eCLAT?

The eCLAT is an excellent strategy for individuals with:

• Significant Estates: Particularly those exposed to estate taxes.
• Philanthropic Goals: A commitment to supporting charitable organizations long term.
• Family Wealth Objectives: A desire to balance giving with ensuring financial security for heirs.
• Complex Holdings: Estates including illiquid assets such as real estate or closely held businesses that require strategic planning.

Why Partner with Granite Harbor Advisors?

At Granite Harbor Advisors, we specialize in tailored strategies like the eCLAT, designed to align with your financial goals and family values.

Our Advantages:

• Comprehensive Planning: We address all aspects of your financial life, including taxes, investments, and estate planning.
• Collaborative Expertise: Our team includes specialists in tax, legal, and insurance planning for well-rounded advice.
• Sophisticated Solutions: From private market investments to advanced estate strategies, we provide unparalleled access to tools and insights.

Secure Your Legacy While Making a Difference

The Enhanced Charitable Lead Annuity Trust is more than a financial strategy—it’s a way to create a lasting impact on the causes you care about while preserving your family’s legacy.

If you’re ready to explore how an eCLAT can enhance your wealth transfer strategy, contact Granite Harbor Advisors today. Together, we’ll design a plan that supports your philanthropic goals and ensures long-term financial security for your family.

By choosing the eCLAT, you can achieve the perfect balance between giving back and securing your family’s future. With the right strategy, you don’t have to choose—you can do both.