“With today’s high federal income tax rates and the estate tax applicable to relatively few estates and at lower rates, there has been an increased focus in estate planning to achieve a step-up in income tax basis at death. However, in most cases moving assets outside of the taxable estate and receiving a step-up in basis are mutually exclusive—you can achieve one but not both. Enter the zeroed-out testamentary charitable lead annuity trust (CLAT) when after death the estate sells its otherwise taxable assets to the family or to trusts for their behalf before the CLAT is funded. When utilized properly for clients who have already done significant lifetime planning, this technique allows for all of the client’s assets to pass to the family with a full step-up in basis, while paying no estate tax, a seemingly impossible achievement.”
Avi Kestenbaum and Mary O’Reilly provide members with their commentary on zeroed-out, testamentary CLATs.