Learn how to reduce your income and estate tax, fast.

Get our tips on big-picture strategy and actionable tactics for startup equity, small businesses, crypto, real estate, and more.


Already Sold Your Assets? It’s Not Too Late For Tax Deferral With A CLAT

Key Takeaway: Sometimes it’s tough to plan for taxable events in advance. Maybe you recently sold your cryptocurrency, minted some popular NFTs, had a surprise opportunity to sell some start-up equity, or just had a really high-income year. If you’ve already sold your assets for a big gain, a Charitable Lead Annuity Trust (CLAT) can help you defer the taxes on that income even after you’ve received the bill.

You’ve had a good year. Maybe you sold your crypto holdings for a significant gain. Maybe you had a good run minting NFTs. Or maybe you exercised your company options anticipating an IPO in the near future. Whatever the reason, you’re now sitting on a pile of cash. That’s great!

At the same time, though, you know you’re also about to be hit with a massive tax bill – as much as 55% if you live in a high-tax state like California or New York. A Charitable Remainder Trust (CRT) isn’t a good fit because CRTs only work for deferring taxes on future capital gains. But sometimes it’s tough to plan for taxable events in advance. Is there anything you can do to reduce what you’re going to owe on gains you’ve already realized?

Good news: There’s another tool — the Charitable Lead Annuity Trust (CLAT) — that offers many of the same tax benefits of the CRT but works specifically for already-realized gains. Long-term tax deferral can be a huge boon, and that makes the Charitable Lead Trust attractive for people aiming to offset unusually high taxable income in a given year.

In this article, we’ll explain how Charitable Lead Trusts work and in what sorts of situations they might prove valuable.

What Are the Benefits of a CLAT?

At a basic level, a CLAT is simple: (1) You put cash or other assets into the trust, (2) you receive an immediate tax deduction for as much as 100% of the value of that cash, (3) your trust makes a donation to your chosen charity every year, (4) you or your beneficiary receive what’s left over at the end of the trust’s term (which can last for as long as you want), and (5) you pay most of your taxes at the end.

charitable lead annuity trust
Charitable Lead Annuity Trust

Why is that all a big deal?

In a sense, the answer is simple: A big tax deduction means you’re going to pay less in taxes this year. If you have $1 million of gains from the sale of an asset this year, you’re going to be on the hook for anywhere from $250,000 (if you have long-term capital gains and live in a no-tax state like Florida) to $550,000 (if you have short-term capital gains or ordinary income and live in a high-tax state like California or New York). With a CLAT, you can reduce that tax bill to $0. It’s an immediate win that can create large returns via compound growth.

At the same time, you’re going to have to make those charitable donations and pay taxes on your money eventually. Are the immediate tax savings really worth it?

The Magic of Compound Growth

In many cases, the answer is a resounding yes. That’s because of the magic of compound growth. If you did no tax planning, let’s say you’d be on the hook for about $450,000 in taxes on a $1 million windfall. You’d be left with about $550,000 to invest (or spend) going forward. If you put your earnings into a Charitable Lead Annuity Trust, by contrast, you would get to deduct as much as 100% of the value (spread out over a couple of years for technical reasons – the IRS doesn’t make anything simple!). So instead of owing $450,000 in taxes on that windfall, you’d owe $0. And instead of investing $550,000, you’d be investing the full $1 million.

You will have to pay a very small tax bill every year, and then a bigger one when you withdraw your money at the end of the CLAT’s term. But you get to invest those savings in the meantime. It’s almost like receiving a 0% interest loan from the government.

And think about what happens when you put those savings into the stock market, crypto, or angel investments: Your tax savings continue to grow. While it seems obvious that you would rather have $1 million in the market working for you than $550,000, most people don’t appreciate how big of a difference that will make over time. Assuming just an ~8% annual return—the average historical return from relatively conservative index investing—will turn into more than $3.6 million in additional gains over 25 years. Even after you pay the taxes you owe on your gains and donate the required amount to the charity of your choice (more on that in a minute), you could come out more than $1.1 million ahead on an initial $1 million exit in that same timeframe. That’s the magic of the one-two punch of federal-tax-advantaged trusts and compounding.

How does a CLAT work?

Mo the NYC artist. A simple example will be helpful. Take Mo, a young artist from New York City who has made a killing minting NFTs this year. He’s earned about $300,000, and it’s all going to be taxed as ordinary income—that’ll be something like $150,000 in federal, state, and local taxes.

Year 1: An immediate and large deduction. Mo works with Valur to put his cash into a 25-year CLAT today. He’ll get an immediate $300,000 deduction (which he can use today or spread out over the next five years). Let’s say he takes the whole deduction over the first two years. His taxable income on his NFT sales will be offset entirely by that deduction, so instead of sending $150,000 to New York and the federal government, he’ll pay $0, and he’ll get to re-invest the full $300,000 and let it grow.

The middle years: Donations and big investment growth. What happens in the following years? Two things. First, Mo’s trust will make a small donation to the charity of his choice – starting around $750, and growing by about 20% every year. Given the relative size of that donation, though, the far bigger deal is that Mo will get to re-invest his full $300,000. (Do note that the rules of CLATs dictate that Mo can’t withdraw the money until the end of the trust’s term – much like the age-related withdrawal restrictions of an IRA.)

Let’s say Mo’s money grows at around 8% per year. After the CLAT’s 25-year term, the trust will have donated about $360,000, and the trust’s assets will be worth about $1.7 million.

The final year: A massive payout. So Mo’s trust has about $1.5 million in the last year. What then? In the final year of the term, Mo will get all of the trust’s assets that have not been donated to charity (about $1.7 million), and he’ll pay taxes on those gains at that point (about $560,000). So, after the accounting, Mo ends up with about $1.1 million in his pocket.

The Impact. Due to the magic of compound growth, Mo grows his initial tax savings into a sizable nest egg. Taking the numbers we gave you above, the gains from a Charitable Lead Trust are striking: Mo would keep about $1.1 million (after taxes) at the end of the trust, versus about $700,000 if he had paid his taxes in year 1 and reinvested what was left. That’s about an additional 60% return! Plus, Mo would be giving about $360,000 to his chosen charity.

clat example
CLAT Example

The Tradeoffs. CLATs are an amazing tax-deferral tool, and, as we’ve demonstrated, the benefits can be substantial. But there are tradeoffs to be made. Most notably, if you put your money into a CLAT, the money is locked away for the entirety of trust’s term.

With that said, there are a couple of factors that minimize the costs of that inflexibility: First, you can direct the trust’s investments during that time, so it’s not like you have no control over your outcomes; and second, you can choose the length of your trust. Typically people set up CLAT’s for a minimum of 15- or 20-years to take advantage of the compounding tax mitigation benefits (depending, of course, on your assets, how quickly you expect your money to grow, and other details).

Next Steps

No doubt CLATs do require you to sacrifice some flexibility, but they can be a great tool if you don’t need your money immediately – much like an IRA. Read more about CLATs in our deep dive into CLATs, or just analyze your potential return on investment with our CLAT calculator.

If you have any questions, reach out to our team of experts!

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.