Low interest rates work in favor of charitable lead annuity trusts (CLATs). With these trusts, a fixed amount is paid to charity for the trust term. At termination, assets revert either to the donor, the donor’s spouse, or to another trust beneficiary.
Therefore, some people are using CLATs to transfer assets to other beneficiaries, who will receive trust assets after the trust term. The lower the interest rate, the higher the value of the distributions from the trust. You subtract the value of the distributions from the amount of the transfer to get the value of the remainder interest, which is the taxable gift to the trust beneficiaries. At today’s interest rates, it’s easier to “zero out” a CLAT and thus avoid any gift tax consequences.
CLATs should be funded with assets likely to produce a high return. Until recently, most people used stocks to fund the trust. Now real estate may be used instead. Income-producing properties are donated, to make the required payments. Normally, you’ll save some complexity by transferring debt-free properties to these types of trusts.
