Charitable Lead Trusts
...continued - pg 2.

5.2 With a CLAT, the determination of the portion of the trust subject to the GST is made at the end of the trust term. In this regard, the amount of the GST exemption is increased by interest at the applicable Sec. 7520 rate when the trust is established, compounded annually, for the period from the allocation of exemption to the trust to the end of the charitable term. The portion of the trust subject to the GST is determined by subtracting from 1 a fraction, the numerator of which is the GST exemption increased as indicated above, and the denominator of which is the value of the property in the trust at the termination of the charitable term.

5.2.1 Because the allocation of exemption must be made at the beginning of the CLT to get the benefit of the increase, but the denominator of the fraction is based on the value of the trust at the end of the term (including any appreciation in value during the trust term), it will not be possible to allocate the exemption with precision to the trust.

5.2.2 The annual compounding will have a significant effect on the GST exemption over a long period. This is illustrated by the following table showing the adjusted GST exemption for 20, 25 and 30 year terms, assuming an IRC Sec. 7520 rate of 7, 8 or 9 percent:

These figures illustrate that, when the trust term is long, a CLAT of significant size may be fully sheltered from the GST. However, when the trust is very large, the adjusted GST exemption will only be partially effective in sheltering the trust.

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