Enhanced Charitable Lead Annuity Trust

The Enhanced Charitable Lead Annuity Trust (ECLAT)  is a flexible planning tool that combines wealth transfer, charitable giving, and income tax reduction. The ECLAT was created by top attorneys to address the high taxation problem that occurs when a client dies with an IRA and an estate tax due.

At death, the IRA can be reduced by two thirds (2/3) or more due to estate and income taxes (IRD). The implementation of the ECLAT can eliminate nearly all taxes, benefit charity, and transfer much more money to the heirs compared to the status quo.

Enhanced Charitable Lead Trust Annuity Example:

The general structure may look like this for a 60-year-old male. $1 million is contributed to an ECLAT that is based on the life of the grantor/insured (not a fixed term of years). The ECLAT is designed to pay $5,000 a year to charity during the term of the trust (lifetime of the insured), and at the end of the trust an additional payment of $1.5 million will be made to charity. For this illustration, we will use the January 2010 Section 7520 rate of 3.0%. This rate is used to determine the present value of the future gift of life insurance to the charity which, in turn, determines the amount of tax deduction.

Of the $1 million contribution, $100,000 is set aside to purchase an income producing municipal bond portfolio. The income and principal of this bond portfolio is adequate to maintain an annual payment to charity of $5,000. The remaining $900,000 is used to purchase a paid up life insurance on the life of the grantor in the amount of $3.8 million.

At death, there will be a final payment to charity of $1.5 million. The heirs will receive $2.3 million of the remaining proceeds of the life insurance policy, and they will also receive the remaining balance of the muni-bond account. Under these facts, the charitable deduction would be $820,734 (82% deduction). Giving more to charity would generate a larger deduction, while giving less will reduce the deduction but increase the remainder interest to the heirs.