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Shark Fin Charitable Lead Annuity Trust

November 2, 2020 Article 1 min read
Rachelle Jeselnik Wealth Management Steven J. Gibson Wealth Management
A Charitable Lead Annuity Trust (CLAT) pays a fixed amount of the trust’s assets to a qualified charitable organization for a specific number of years or for the life of the donor. At the end of the term, the trust’s principal is paid to the grantor, family members, or other non-charitable remainder persons.
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When a CLAT is created, it can be set up as a grantor trust or a non-grantor trust. The illustrations and examples set forth in this article assume that the donor established a grantor CLAT. With a grantor CLAT, the grantor receives an immediate income tax deduction for the present value of the annuity stream going to charity. The grantor then pays the income tax on all trust taxable income for the term of the trust (including the income used to pay the lead interest to the specified charity). The income tax deduction is limited to 30 percent of AGI, or 20 percent of AGI for gifts of appreciated property. If not fully used in the initial year, it can be carried over for an additional five years.

The Shark Fin CLAT is considered to be the most aggressive type of CLAT structure. It derives its name from the graphical representation of small annuity payments over the term of the CLAT, which spike at the end of the term with a large balloon payment, resulting in a graphical line that resembles a shark’s fin.

On its surface, the CLAT instrument appears very straight forward. However, add in the “Shark Fin” component and some commentators feel like they have entered into unchartered waters with the IRS. This article focuses on examples, illustrations, and current research to show that the Shark Fin CLAT technique is worth a deep dive for high-net-worth clients that have an appetite for a unique wealth transfer opportunity.

Securities are offered through Valmark Securities Inc. member FINRA and SIPC, an unaffiliated securities brokerdealer.

The material contained in the herein is for informational purpose only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Consult your financial professional before making any investment decision. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy. Valmark Securities supervises all life settlements like a security transaction and its’ registered representatives act as brokers on the transaction and may receive a fee from the purchaser. Once a policy is transferred, the policy owner has no control over subsequent transfers and may be required to disclosure additional information later. If a continued need for coverage exists, the policy owner should consider the availability, adequacy and cost of the comparable coverage. A life settlement transaction may require an extended period to complete and result in higher costs and fees due to their complexity. Policy owners considering the need for cash should consider other less costly alternatives. A life settlement may affect the insured’s ability to obtain insurance in the future and the seller’s eligibility for certain public assistance programs. When an individual decides to sell their policy, they must provide complete access to their medical history, and other personal information.

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