Charitable Lead Trust (CLT): Give to Charity Now, Pass Wealth to Heirs Later

CLT vs. CRT: the fundamental difference

Both CLTs and CRTs split an asset between charity and family. The difference is timing:

The short version: if you have more money than you need and want to efficiently transfer wealth to heirs while funding your charitable goals, a CLT is designed for that. If you have a large capital gain you want to defer while generating income, a CRT is more likely the right tool.

CLAT vs. CLUT: which structure

The vast majority of CLTs use the CLAT structure. The zeroed-out CLAT is the dominant planning technique, and the rest of this guide focuses on it.

How the zeroed-out CLAT works

In a "zeroed-out" CLAT, the annuity payments to charity are calibrated so that their present value — discounted at the §7520 rate — exactly equals the amount you contributed to the trust. The taxable gift to your heirs at inception is therefore zero.

The math is straightforward: the trust needs to outperform the §7520 hurdle rate (5.20% in August 2026) to leave anything for heirs. Assets that earn the hurdle rate leave heirs with nothing — but they gave millions to charity. Assets earning more than the hurdle pass the entire excess to heirs gift-tax-free.

The §7520 rate is the CLAT hurdle rate

The Section 7520 rate is set monthly at 120% of the applicable federal midterm rate (AFR). For August 2026 it is 5.20%.¹ This rate is the all-important hurdle: only returns above 5.20% translate to heirs' wealth. How much you need the trust to return depends on:

• What you fund with. A diversified equity portfolio or private equity that historically earns 8–12% has a realistic chance of beating 5.20%. A bond portfolio averaging 5–6% does not leave much margin.
• The trust term. Longer terms give more time for compounding above the hurdle — and give the annuity burden more time to erode principal if returns are weak.
• Future §7520 rates. For a CLUT, rates matter at every revaluation. For a CLAT, only the rate at inception matters — locking in a lower hurdle when rates are low produces larger expected heirs' transfers.

Grantor vs. non-grantor CLT: which controls the tax treatment

The tax code offers two ways to structure a CLT, with very different consequences:

In practice, nearly all CLTs are non-grantor. The grantor CLT gives you a large income tax deduction now but forces you to pay tax on trust income for the life of the trust — a deferred tax bill that usually exceeds the upfront savings. Non-grantor CLATs are the planning workhorse.

The four-step gift tax calculation

For a non-grantor CLAT, the gift tax calculation is mechanical:

1. Determine the §7520 rate for the month of funding. August 2026: 5.20%.
2. Set the annuity amount. For a zeroed-out CLAT: annuity = funding amount ÷ annuity factor at §7520 rate for the chosen term.
3. Calculate present value of the charitable lead. PV = annuity × annuity factor. In a zeroed-out CLAT, PV equals the funding amount.
4. Taxable gift = funding amount − PV of charitable lead. In a zeroed-out CLAT: $0 taxable gift. No exemption used.

Because the taxable gift is zero, a zeroed-out CLAT is sometimes called an "exemption-free" transfer tool — it doesn't compete with your $15 million lifetime exemption.² You can run a CLAT alongside a SLAT, dynasty trust, or annual gifting program, and they don't conflict.

Interactive CLAT calculator

Adjust the inputs to model your zeroed-out CLAT. The calculator sets the annuity at the level that zeroes out gift tax at the August 2026 §7520 rate (5.20%), then projects the heirs' remainder based on your expected return.

OBBBA impact on CLT planning (2026)

The One Big Beautiful Bill Act (July 2025) made several changes relevant to CLT planning:

What didn't change: the gift/estate tax mechanics

OBBBA did not alter how CLTs are valued for gift and estate tax purposes. The zeroed-out CLAT calculation — PV of annuity at §7520 rate — is unchanged. The $15M permanent exemption under OBBBA means fewer families face federal estate tax, but CLTs still work for:

• Families in estate-tax states (Oregon: $1M exemption, Massachusetts: $2M, Washington: $3.1M, Minnesota: $3M)
• Families expecting estate growth to approach the $15M federal threshold
• Anyone who values the charitable transfer regardless of estate tax

What changed: the charitable deduction cap

OBBBA added a 35% effective cap on itemized deduction benefit for 37%-bracket taxpayers, and a new 0.5% AGI floor on charitable deductions.³ These changes affect grantor CLTs (which give the donor an income tax deduction) but not non-grantor CLTs (which generate no income tax deduction for the donor at all). Since virtually all CLTs are non-grantor, OBBBA's charitable deduction changes have minimal impact on standard CLT planning.

OBBBA makes CLTs more relevant, not less

With the federal estate exemption now permanent at $15M (OBBBA, §11101), families below that threshold have less urgency to use exemption-consuming tools like GRATs, SLATs, and dynasty trusts. A zeroed-out CLAT doesn't consume exemption at all — it supplements those strategies. Families who maxed out SLATs or dynasty trusts in prior years can use a CLAT to continue transferring future appreciation without re-touching the exemption.

When CLTs make sense — and when they don't

Good candidates

• Families with genuine charitable intent. A CLT that delivers $3–5M to charity over 10 years isn't just a tax play — it's a real philanthropic commitment. The charitable stream is irrevocable.
• High-growth assets. Private equity, concentrated growth stock, or business interests expected to significantly outperform 5.20% are ideal. The wider the return-over-hurdle spread, the more compelling the heirs' transfer.
• Families with existing wealth above their spending needs. The CLAT removes the funded assets from your control for the term. You need to not need that money.
• Estate sizes where state estate tax applies. Oregon's $1M exemption, Massachusetts's $2M, Washington's $3.1M all create meaningful estate tax at $5M–$15M wealth levels where the federal exemption has no bite.
• §7520 rate is low. Lower rates produce larger charitable deductions → smaller taxable gift → better strategy. At 5.20%, CLATs work but are not at their ideal rate environment. If rates drop to 3–4%, CLATs become extremely powerful.

Poor candidates

• Families who need income from the asset. The asset is irrevocably committed; no income comes back to the donor during the trust term (charity gets it).
• Conservative investment objectives. A 5.20% hurdle means low-return portfolios leave nothing for heirs. CLATs funded with bond portfolios rarely make sense at current rates.
• Uncertain charitable beneficiary. The charitable designation must be set at funding and is irrevocable (absent specific trust terms). Families without a clear charitable vision should consider a donor-advised fund first.
• Short time horizons. CLATs need time to compound above the hurdle. 3–5 year terms at 5.20% require exceptional returns; 10–20 year terms are more forgiving.

Coordination with other estate strategies

CLTs layer cleanly with the full wealth-transfer toolkit:

• Versus GRATs: Both transfer appreciation tax-free. A GRAT transfers appreciation back to the grantor as an annuity; a CLAT sends the annuity to charity. If you want to maximize heirs' transfer and don't care about charity, a GRAT is usually preferable (GRAT annuity goes to you, not away). If charitable giving is a genuine goal, the CLAT accomplishes both simultaneously.
• Versus CRTs: If you want income now and have a large capital gain to defer, CRT. If your estate is large, you don't need income, and you want heirs to receive a future transfer, CLAT. They solve different problems.
• Versus DAFs: A DAF is simpler and more flexible (recommend grants at any time). A CLAT makes a larger, scheduled commitment and adds the heirs' transfer. Use a DAF as the CLAT's charitable beneficiary if you want to retain grantmaking flexibility.
• Versus outright gifting: Annual gifting at $19,000/donor costs exemption (or uses annual exclusion). A zeroed-out CLAT can transfer millions with no exemption cost, at the price of an upfront charitable commitment.

Key implementation considerations

Trustee choice

The CLAT trustee controls investment decisions — and investment performance directly determines whether heirs receive anything. Many families use a corporate trustee or investment manager for CLATs funded with diversified assets, or retain investment discretion through a directed trust. For CLATs funded with a single concentrated position (pre-IPO stock, closely held business), the trustee's role in executing the liquidity event is critical.

Charitable beneficiary

Options include: (1) a donor-advised fund you control for grantmaking flexibility, (2) a private foundation you established, (3) a specific operating charity. Using a DAF as beneficiary gives the family ongoing control over how the charitable payments are granted out — often preferable to locking in a single charity at trust funding.

Tax reporting

A non-grantor CLAT files Form 1041 annually. Charitable payments from the trust are deductible against trust income under IRC §642(c). In years when investment income exceeds charitable distributions, the trust may have taxable income — typically taxed at compressed trust rates (37% bracket above $15,200 in 2026). Structuring the investment portfolio to limit trust-level income (favoring total-return over dividend/interest income) reduces this.

5-step process before funding a CLAT

1. Confirm charitable intent. The stream to charity is irrevocable. If you'd regret sending $300,000/year to charity for 10 years regardless of what else happens, a CLAT isn't right.
2. Identify the right asset. High-growth, illiquid, or pre-liquidity assets are ideal. Model return scenarios — conservative, base, and optimistic — and understand what heirs receive in each.
3. Check the §7520 rate. If rates are expected to decline, waiting may improve the hurdle. At 5.20% today, the CLAT works for high-growth assets; at 3–4% it would work for a broader set of portfolios.
4. Choose the structure. Non-grantor CLAT in almost all cases. Confirm with your attorney and estate planner.
5. Run actuarial calculations. The IRS tables and §7520 rate determine the annuity precisely. This requires a trust attorney and, often, an estate planning specialist coordinating the investment policy, trustee agreement, and charitable beneficiary designation.