CLAT Solution to Passing on a Family Business and Getting a Charitable Deduction

Douglas W. Stein (Attorney at Law, Barris, Sott, Denn & Driker, P.L.L.C.) has recently published his article entitled The Leveraged Family Business CLAT, Prob. & Prop., Sept./Oct. 2007, at 62.

Here is an introduction to his article:

Although charitable lead trusts have been with us for decades, their use was thrust into the limelight after the death of Jacqueline Kennedy Onassis in 1994. Mrs. Onassis’s will contained a long-term charitable lead annuity trust (CLAT) that was funded by her residuary estate. On the termination of the lead interest, the trust assets were to be distributed to the descendants of her children. Based on the applicable Code § 7520 rate in effect on the date of her death, her estate was entitled to a charitable deduction of approximately 97% of the assets passing to the CLAT. * * * Since Mrs. Onassis’s death, several published articles have discussed the benefits of testamentary charitable lead trusts.

            This article discusses a technique that allows decedents to pass their closely held businesses to their beneficiaries through a testamentary CLAT while simultaneously allowing the beneficiaries to reap some of the benefits of outright ownership. Most important, this technique allows decedents to pass S corporation stock, limited liability company interests, or partnership interests to their children without violating the self-dealing and other private foundation rules applicable to CLATs and simultaneously generate a significant charitable deduction.