A CLAT is a charitable entity - "Charitable Lead Annuity Trust" - which capitalizes on the time value of money. The following blurb discusses how to modify the language in a CLAT for superior results.
One Possible "Form Book" provision for Super Formula CLAT might look like this:*
A. In determining the value of the charitable lead interest and the value of the noncharitable remainder interest for federal estate tax purposes, it is my intention that the value of the noncharitable remainder interest, as determined in the estate tax proceeding relating to my estate be equal to, or as nearly equal as possible to zero.
B. In calculating the value of the charitable lead interest and noncharitable remainder interest I direct that the following provisions shall apply.
(1) I direct that the Annuity Amount paid for the remainder of the life (here referred to as the "Term") of that person who has the longest life expectancy of any individuals named on the list below as of the date of death:
(a) Individual #1.
(b) Individual #2.
(c) Individual #3.**
For purposes of this subparagraph (1), if any individual listed above is terminally ill (as defined in Regs. S25.7520-3(b)(3)) at the time of my death such individual shall be conclusively presumed to have predeceased me and to have a life expectancy of zero years.
(2) The term "Section 7520 rate" shall refer to the applicable interest rate determined under S7520 of the Code which is equal to the lowest of the interest rates determined under S7520 of the Code for the month in which the valuation date occurs or either of the two months preceding the month in which the valuation date occurs. For purposes of the preceding sentence, the term “valuation date” shall mean the date on which any property passing under the provisions of this Article shall be valued for purposes of the federal estate tax proceeding relating to my estate.
(3) The "Annuity Amount" shall mean that amount determined by applying the following formula based on the Term:
(a) Determine the amount by which the trust established under this Article is to be funded (valued and composed as finally determined in the federal estate tax proceedings related to my estate) (hereinafter referred to as amount "F"). The amount by which the trust established under this Article is to be funded is set forth in Article ***** of this Will/Trust Agreement.
(b) Determine the value of the noncharitable remainder interest (hereinafter referred to as amount "REM"). The value of the noncharitable remainder interest should equal or be as nearly equal to zero as is possible.
(c) Subtract the amount determined under the foregoing clause (b) from the amount determined under the foregoing clause (a) (F - REM). The result of this equation will produce the value of the charitable lead interest (hereinafter referred to as amount "CLI").
(d) Determine the annuity factor in Table S of IRS Publication 1457 for the applicable Section 7520 rate (hereinafter referred to as "TS").
(e) Determine the Table K adjustment factor for the frequency of payments of the Annuity Amount and the Section 7520 rate (hereinafter referred to as "TK").
(f) Multiply TS by TK (TS x TK). The product will produce the annuity payment determination variable (hereinafter referred to as amount "AV").
(g) Divide CLI by AV (CLI / AV). The result of this equation will be the Annuity Amount.
* This article is excerpted from Tax Managements Estates, Gifts and Trusts Journal, pp.209-210, 1998.
** Note that using a group of three individuals in the list and ultimately using the individual with the longest life expectancy provides a hedge against the death of any one person on the list and/or the possibility that it might not be permissable to use the life expectancy of a member of the group because of the rule set forth in Regs. S25.7520-3(b)(3).
