Charitable Lead Annuity Trust (CLAT) Declaration

DECLARATION OF CHARITABLE LEAD ANNUITY TRUST

I. PREAMBLE AND PARTIES

This Declaration of Charitable Lead Annuity Trust ("Trust") is made and entered into effective [__/__/____] ("Effective Date"), by and between:

The Grantor hereby declares that [she/he/they] holds and shall hold the property described in Schedule A, attached hereto and incorporated herein by reference, in trust upon the terms and conditions hereinafter set forth.

II. TRUST PROPERTY AND INITIAL FUNDING

The Grantor transfers and delivers to the Trustee the property described in Schedule A, which shall constitute the initial corpus of the Trust. The Trustee acknowledges receipt of such property and shall hold, manage, invest, and reinvest the same upon the terms of this Declaration of Trust.

Schedule A: Initial Trust Property
[________________________________]

III. CHARITABLE ANNUITY PAYMENTS

A. Annuity Amount and Payment Schedule

For a term of [______] years [or for the life/lives of _______________], the Trustee shall pay to [QUALIFIED CHARITABLE ORGANIZATION NAME], EIN [_______________], an annual annuity in the amount of $[_______________] (the "Annuity").

Annuity payments shall be made:
☐ Quarterly (on [________], [________], [________], [________])
☐ Semi-annually (on [________], [________])
☐ Annually (on [________])

The first payment shall be made on [__/__/____].

B. Payment Obligation

The Annuity shall be paid from income and corpus of the Trust estate in such proportions as the Trustee determines. If the Trust's income is insufficient in any year, the Trustee shall pay the Annuity from principal. The Annuity shall constitute a mandatory distribution and shall not be subject to the Trustee's discretion.

C. Termination of Charitable Payments

Upon expiration of the trust term [or death of the survivor of _______________], the Annuity payments shall cease, and the remaining Trust estate shall be distributed as provided in Section IV below.

IV. REMAINDER DISTRIBUTION

A. Primary Remainder Beneficiaries

Upon termination of the charitable annuity interest, the Trustee shall distribute the remaining net income and principal of the Trust estate to:

B. Per Stirpes Distribution

If any remainder beneficiary predeceases the termination of the trust term, [her/his/their] share shall pass to [her/his/their] lineal descendants per stirpes, or if none, to the surviving remainder beneficiaries in equal shares.

C. Contingent Beneficiaries

If no remainder beneficiary survives termination, the remaining estate shall be distributed to:
[________________________________]

V. TRUSTEE POWERS AND DUTIES

A. Powers of Investment and Management

The Trustee shall have full power to:

1. Invest and reinvest the Trust estate in any securities, real property, or other property, whether or not such investments produce income;
2. Sell, exchange, lease, encumber, or otherwise dispose of any Trust property;
3. Exercise voting rights with respect to securities held in the Trust;
4. Retain property transferred to the Trust without diversification;
5. Borrow money on such terms as the Trustee deems appropriate, secured by Trust property.

B. Charitable Payments Must Not Impair Remainder

The Trustee shall not take any action that would impair the charitable organization's right to receive the Annuity, nor shall the Trustee modify the Annuity amount or payment schedule without the written consent of the charitable organization and compliance with IRC § 170(f)(2)(B).

C. No Commutation or Modification

The Annuity may not be commuted, accelerated, deferred, increased, or decreased. The Trustee shall not divide or combine the Annuity payments with any other Trust interest.

VI. TAXATION AND ACCOUNTING

A. Allocation to Charitable Interest and Remainder

For federal gift and estate tax purposes, the value of the charitable interest shall be determined using the Section 7520 rate applicable on the valuation date, in accordance with IRC § 7520 and Treasury Regulation § 20.7520-1.

The present value of the remainder interest shall be calculated as follows:

• Initial Trust Corpus: $[_______________]
• Section 7520 Rate (as of [__/__/____]): [_____]%
• Annuity Payment: $[_______________]
• Term: [_____] years
• Present Value of Annuity: $[_______________]
• Present Value of Remainder: $[_______________]

B. Charitable Deduction

The Grantor shall be entitled to a charitable deduction for federal income tax purposes in the amount of the present value of the charitable annuity interest, subject to IRC § 170(f)(2)(B) limitations and the Grantor's adjusted gross income limitations in IRC § 170(b).

C. Annual Reporting

The Trustee shall file all required tax returns, including:

• Form 709 (Gift Tax Return) with respect to the remainder interest, if applicable;
• Form 1041 (Fiduciary Income Tax Return), if the Trust is a non-grantor trust;
• Form 1040 Schedule C/E (if grantor CLAT, income reported on Grantor's Form 1040).

VII. GRANTOR TRUST STATUS ELECTION

A. Grantor CLAT Election (IRC § 671 et seq.)

☐ ELECTED: The Grantor elects to be treated as the owner of the Trust for federal income tax purposes under IRC §§ 671-679, effective as of the Effective Date. The Trustee shall:

• Report all Trust income, deductions, and credits to the Grantor on Form K-1;
• File Form 8288-B (or successor) reporting the grantor-trust election;
• File no separate Form 1041 for the Trust.

The Grantor shall report all Trust income, gains, losses, and deductions on [her/his/their] Form 1040, and shall receive the income tax charitable deduction for the Annuity payments.

B. Non-Grantor CLAT Election

☐ ELECTED: The Grantor elects NOT to be treated as the owner of the Trust for income tax purposes. The Trust shall be a grantor's non-grantor charitable lead trust, subject to taxation under IRC §§ 641-665. The Trustee shall:

• File Form 1041 (Fiduciary Income Tax Return) annually;
• Report income and deductions attributable to the Trust in accordance with IRC § 641 et seq.;
• Deduct the Annuity payment from Trust taxable income under IRC § 642(c).

VIII. SUCCESSOR TRUSTEE AND TRUSTEE SUCCESSION

A. Initial Trustee

[TRUSTEE NAME] is designated as Initial Trustee.

B. Successor Trustees

Upon the death, incapacity, resignation, or removal of the serving Trustee, the following shall serve as Successor Trustee in order of succession:

1. [SUCCESSOR TRUSTEE NAME]
2. [SUCCESSOR TRUSTEE NAME]
3. [INSTITUTIONAL TRUSTEE, e.g., [Bank/Trust Company Name], N.A.]

C. Resignation and Removal

Any Trustee may resign upon thirty (30) days' written notice to the Grantor (if living), the charitable organization, and the remainder beneficiaries. The Grantor (if living) may remove any Trustee without cause and appoint a successor.

IX. PROHIBITED TRANSACTIONS

The following provisions shall apply to all CLATs to ensure compliance with IRC §§ 4941-4948 (if the Trust is deemed to engage private foundation activities):

1. No Self-Dealing: The Trustee shall not engage in any self-dealing transaction (within the meaning of IRC § 4941) between the Trust and any disqualified person.
2. No Jeopardy Investments: Investments shall not jeopardize the payment of the Annuity.
3. Charitable Interest Protection: The charitable organization's right to the Annuity shall not be subordinated to any other interest or obligation.

X. AMENDMENT AND REVOCATION

A. Restrictions on Amendment

Except as expressly provided herein, this Trust may NOT be amended or revoked by the Grantor or any other person, as amendments affecting the Annuity or the charitable organization's interest would violate IRC § 170(f)(2)(B).

B. Minor Modifications

The Trustee may amend administrative provisions (e.g., trustee succession language, accounting methods) with written consent of the Grantor (if living) and the charitable organization, provided such amendments do not affect the valuation of the charitable interest or remainder interest.

XI. SPECIAL PROVISIONS FOR SPECIFIC CLAT STRUCTURES

A. Zeroed-Out CLAT

☐ ELECTED: This is a "zeroed-out" CLAT. The Annuity amount is calculated so that the present value of the remainder interest, using the Section 7520 rate as of the valuation date, equals zero (or the minimum taxable gift under the annual exclusion if applicable). This structure minimizes gift tax on the remainder while allowing any appreciation above the Section 7520 rate to pass to beneficiaries free of transfer tax.

Annuity Calculation (Zeroed-Out Basis):

• Initial Corpus: $[_______________]
• Section 7520 Rate: [_____]% (Month of [__/__/____])
• Annuity (calculated to zero remainder): $[_______________] per year
• Term: [_____] years
• Projected Remainder at [_____]% growth: $[_______________] (illustrative)

B. Intentional Remainder Interest CLAT

☐ ELECTED: This CLAT is structured to transfer a substantial remainder interest to the remainder beneficiaries, with a gift tax value of approximately $[_______________]. The Annuity is less than the zeroed-out amount, resulting in a larger remainder interest subject to gift tax.

C. Floating-Rate CLAT (if permitted)

☐ ELECTED: The Annuity shall be adjusted annually based on a variable interest rate or investment performance metric. NOTE: Only permissible if this Declaration complies with IRC § 170(f)(2)(B) and Treasury Reg. § 1.170A-6(c)(2). Counsel must verify that any floating mechanism does not violate the prohibition on commutation or modification of the Annuity.

XII. CHARITABLE ORGANIZATION ACKNOWLEDGMENT

The charitable organization named above acknowledges receipt of notice of its designation as the recipient of the Charitable Annuity and consents to serve:

[CHARITABLE ORGANIZATION NAME]

By: _____________________________ Date: [__/__/____]

Name & Title: _____________________________

EIN: [_______________]

XIII. REPRESENTATIONS AND WARRANTIES

The Grantor represents and warrants that:

1. The Grantor is the beneficial owner of all property transferred to this Trust and has full power to transfer such property;
2. There are no adverse claims, liens, or encumbrances on the Trust property except as disclosed in Schedule A;
3. The charitable organization is a qualified charitable organization under IRC §§ 170(c), 2055(a), and 2522(a);
4. The Grantor has received independent legal and tax advice regarding the tax consequences of this Trust;
5. The Grantor intends this Trust to comply with all applicable federal and state laws.

XIV. EXECUTION AND EFFECTIVE DATE

IN WITNESS WHEREOF, the Grantor has executed this Declaration of Charitable Lead Annuity Trust as of the Effective Date written above.

TRUSTEE ACCEPTANCE:

XV. NOTARIZATION

STATE OF [_______________]
COUNTY OF [_______________]

Before me, the undersigned Notary Public, personally appeared [GRANTOR NAME] and [TRUSTEE NAME], known to me to be the Grantor and Trustee named in the foregoing instrument, and they being duly sworn, declared that they signed the foregoing instrument as their free and voluntary act for the purposes therein expressed.

WITNESS MY HAND AND SEAL:

SOURCES AND REFERENCES

• IRC § 170(f)(2)(B): Requirements for charitable deduction of income interest in trust.
• IRC § 2055(e)(2)(B): Estate tax charitable deduction for charitable lead interests.
• IRC § 2522(c)(2)(B): Gift tax charitable deduction for charitable lead interests.
• IRC § 7520: Valuation of annuities, life interests, and remainder interests.
• Rev. Proc. 2007-45: IRS Sample Inter Vivos CLAT Forms (grantor and non-grantor).
• Rev. Proc. 2007-46: IRS Sample Testamentary CLAT Form.
• Treas. Reg. § 1.170A-6(c): Charitable deduction for net income or fixed annuity interest.
• Treas. Reg. § 20.7520-1: Valuation tables for federal estate tax purposes.
• Treas. Reg. § 25.7520-1: Valuation tables for federal gift tax purposes.
• IRC §§ 671-679: Grantor Trust Rules (if grantor CLAT election made).
• IRC §§ 641-665: Taxation of Grantor Versus Non-Grantor Trusts.

END OF TEMPLATE

IMPLEMENTATION NOTES FOR PRACTITIONERS

CLAT Structure Selection

Grantor CLAT (IRC § 671-679 Election):

• Grantor taxed on all trust income but receives income tax deduction for annuity.
• Remainder interest typically escapes estate inclusion if properly structured.
• Effective when Section 7520 rates are high (larger annuity to charity, smaller remainder interest for gift tax).
• Requires Form 8288-B filing; trust is treated as grantor's "grantor trust" for income tax only.

Non-Grantor CLAT:

• Trust pays separate income taxes; deducts annuity under IRC § 642(c).
• Charitable deduction taken at trust formation (not annually).
• Appropriate when grantor wants lower income tax burden; trust preserves income.

Zeroed-Out Mechanics

In a typical zeroed-out CLAT:

• Annuity is sized so that PV(Annuity) ≈ Initial Corpus.
• PV(Remainder) ≈ $0 (gift tax value).
• If portfolio grows faster than Section 7520 rate, excess accrues to heirs tax-free.
• If portfolio underperforms Section 7520 rate, less reaches heirs, but no gift tax penalty.

Section 7520 Rate Sensitivity

The IRC § 7520 rate applicable in the month of trust creation locks in the discount rate:

• High rates → smaller annuity needed to zero out remainder → larger remainder interest passes to heirs.
• Low rates → larger annuity needed → smaller remainder escapes gift tax.
• Timing of trust creation is critical tax planning decision.

Charitable Deduction Compliance

IRC § 170(f)(2)(B) requires:

1. Annuity must be fixed (cannot be tied to trust income or asset value).
2. Annuity must be paid annually or more frequently.
3. Annuity cannot be commuted, accelerated, or modified.
4. Charitable organization must be a qualified organization under § 170(c).
5. Remainder interest (if any) must pass only to non-charitable beneficiaries or revert to grantor.

Failure to comply can disallow the charitable deduction and expose the trust to transfer tax exposure.

Multi-State Considerations

• Situs: CLAT can be created under law of any state; most practitioners use state of residence or state law permitting grantor-settlor trusts.
• Portability & Apportionment: Some states may impose state income or estate tax on remainder interests. Verify state law.
• Charitable Solicitation: If charitable organization operates in multiple states, verify multi-state registration requirements.