A charitable lead annuity trust forms a separate entity (an irrevocable trust) that retains assets from a grantor. These assets then pay out income to a charity until the term has extinguished. Once the term extinguishes, the assets are passed to a beneficiary. Since this is an irrevocable trust, it will require a separate Trust Tax ID Number. A Trust Tax ID (also called a Trust EIN or Employer Identification Number) is used as federal identification for the purposes of tax returns. During the time the charitable lead annuity trust exists, it is responsible for its own taxes.
Many people set up CLATs as a way to manage their family’s inheritance, because they are able to pass their assets down to their beneficiaries once they pass. Until then, they don’t need to pay taxes on the assets, and the income from the assets go to charity instead. Thus, it’s a way to hold an asset without any tax consequences until the asset transfers to the newest generation.