Charitable Lead Annuity Trusts – A Wealth Transfer Opportunity
in a Low-Interest-Rate Environment

Greetings and Happy New Year from the University of Wyoming Foundation!  As we embark upon 2009, interest rates have reached historical lows. The infamous “7520 rate”—which represents the interest rate used to calculate the present value of term interests, life interests, annuities, and remainder interests as calculated and published monthly by the Internal Revenue Service—is also at an all-time low of 2.4%. With this low 7520 rate comes the opportunity to pass significant wealth to children, grandchildren, and charities, all gift- and estate tax-free.

Non-Grantor Charitable Lead Annuity Trust

A Non-Grantor Charitable Lead Annuity Trust, commonly known as a Non-Grantor CLAT, presents just such an opportunity for a donor to leverage a low 7520 rate for the benefit of UW and his or her family. The CLAT in its simplest form involves a transfer of property by a donor to a trust that then provides annuity payments for a period of years to the UW Foundation. At the end of the trust term, the principal typically passes on to the children and/or grandchildren of the donor. If structured as a “zero-out CLAT,” the remaining principal is passed to the children and/or grandchildren, gift- and estate tax-free.

For example, CB and Martha Joe, long-time UW supporters, age 65, were on the verge of making a large pledge to the University of Wyoming. They were a little leery because their investment portfolio had plummeted in recent months. However, CB and Martha have saved well and have accumulated more wealth than they will ever need. In fact, when we analyzed their estate, we discovered that their current plan includes a significant gift to Uncle Sam upon the death of the survivor of CB and Martha. The Joes’ plan provides for the bulk of their estate to pass equally to their two children, but they have not yet made provision for their four grandchildren. They would much rather see these assets go to their children and grandchildren and to UW. Through several in-depth meetings with the Joes and their advisors, we were able to show that they could pass a significant amount of wealth to their grandchildren without triggering any estate or gift tax.

After discussing the various options, CB and Martha decided to create a 30-year CLAT funded with an initial gift of $1,000,000. The CLAT will pay the UW Foundation a 5% annuity, or $50,000 per year for 30 years. Upon the expiration of the trust term, the remaining principal will pass to their four grandchildren in equal shares. Assuming that the CLAT assets grow at a rate of 8%, the grandchildren will each receive $1,045,164 at the end of 30 years.

The $50,000 annual payment to the UW Foundation will create an endowment that will be used in accordance with CB and Martha’s wishes. When the CLAT was signed, the Joes executed an endowment agreement with the Foundation that spelled out their intent for the fund. This agreement and prudent management by the UW Foundation will ensure that the fund will benefit many generations to come.   

State of Wyoming Endowment Challenge Program

With the Wyoming State Match, there is an additional incentive to create a CLAT with the University of Wyoming as the charitable beneficiary. Currently, under the State of Wyoming Endowment Challenge Program, the State of Wyoming will match the CLAT annuity commitments in five-year increments. At a minimum, the CLAT structure in conjunction with a five-year pledge agreement will secure matching funds of $250,000. Each year, the UW Foundation and the Joes will execute a new pledge agreement to secure an additional $50,000 in matching funds.  The matching funds will be added to the Joes’ endowment fund and managed and distributed by the UW Foundation in accordance with their endowment agreement—making their already remarkable gift even more impacting. 

Call Tracy R. Richardson, Director of Planned Giving, at 307-766-3934 or e-mail, trichar6@uwyo.edu, for more information about Charitable Lead Trusts or any other planned giving opportunities at UW.