How-to / IRC §§ 170, 2522, 7520
How to Zero Out a CLAT
A zeroed-out Charitable Lead Annuity Trust transfers asset appreciation to heirs free of gift and estate tax, in exchange for a fixed charitable annuity. Here's the five-step playbook.
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Financial Freedom Librarian
Fiduciary Research Editor
J.D., LL.M. (Taxation) — supervising fiduciary review
Last updated
View all sources →Step 1
Lock the § 7520 rate and select the term
The § 7520 rate is published monthly. Lock the rate for the month of funding. Choose a term (e.g., 15–25 years) that matches expected asset growth.
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Step 2
Solve the annuity payout that produces a ~$0 remainder
Use Pub. 1457 Table B annuity factors to size the annual payout so that the present value of the charitable stream equals the funded value — leaving a near-zero taxable remainder.
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Step 3
Draft and fund the CLAT
Execute the CLAT instrument. Fund with appreciating assets. The grantor takes a § 170(f)(2)(B) income-tax deduction (grantor CLAT) or a § 2522 gift-tax deduction (non-grantor CLAT).
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Step 4
Pay the annuity to charity each year
Trustee pays the fixed annuity from trust assets (cash or in-kind). File Form 5227 annually disclosing payments and trust accounting.
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Step 5
Distribute the remainder to heirs at term-end
Whatever remains after the final annuity passes to heirs gift- and estate-tax free. Archive the funding actuarial memo, § 7520 lock, annual 5227s; anchor on Stellar.
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Statutes & authorities
- IRC § 170(f)(2)(B) — Charitable contribution deduction for CLAT
- IRC § 2522(c)(2) — Gift-tax charitable deduction
- IRC § 7520 — Valuation tables
- Treas. Reg. § 25.7520-3 — Special rules
- IRS Publication 1457 — Actuarial Valuations Version 4A