Charitable Lead Trusts

Charitable Lead Trusts

Article posted in Charitable Lead Trust on 26 June 2003| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 16 September 2012


In this edition of Gift Planner's Digest, Robert Lew and Darryl Ott, Esq. provide a concise overview of the variety of charitable lead trusts and provide eight creative case studies that illustrate their application.

Case Study Three: Family Farm

(Intervivos, CLAT, and Non-Grantor)

The potential donors own farmland valued today at $3,000,000, which has an income tax basis of $2,000,000. There is no debt secured by the property, and the property is leased at an annual rental of $120,000 over the 10-year term of the lease. The land is in the path of development and is expected to be worth 10 million dollars in 10 years.

The donors have a sizable estate in addition to the farmland, and they have worked with their children to establish a family financial philosophy that embraces the use of charitable planned giving tools.

The donors first establish a limited liability company and contribute the farmland into the LLC. The donors are designated as the only "managers" of the LLC thereby retaining total control over all of the decisions to be made with respect to the real property. At the time of the contribution of the real property to the LLC, they obtain a formal appraisal of the real property ($3,000,000), and then a second formal appraisal of the value of the membership interests in the LLC. The second "business valuation" appraisal establishes a rather conservative valuation adjustment (a "discount") for the interests in the LLC of 33%.

Immediately following the completion of the business valuation appraisal, the donors make a gift of 99% of the interests in the LLC (at their "adjusted" value of $2,010,000) to a charitable lead annuity trust with a 6% payout rate and a term of 10 years. The rent (at 4% of the current value of the underlying real property) is sufficient to make the lead interest payout of 6% each year to the charities designated in the CLT. The beneficiaries of the remainder from the CLT are the children of the donors, all of whom also have young children.

The donors use their total unified credit of $1,300,000 to offset this taxable gift. And, the double discounting through the use of the LLC and the CLT results in a present gift of under $1,300,000. The donors therefore do not need to pay any gift tax at the time of the completion of the gift to the CLT.

Financial Results:
  No Planning No LLC - Direct To Children Now LLC LLC/CLAT
Asset Value At Date Of Death Or Of Gift $10,000,000 $3,000,000 $3,000,000 $3,000,000
Value Of Gift To Children $0 $3,000,000 $2,010,000 $1,170,733
Estate Or Gift Tax $5,500,000 $741,000 $284,300 $0
Capital Gain Taxes $0 $2,160,000 $2,160,000 $2,160,000
Net To Children After Sale At End Of 10 Years $4,903,7001 $8,004,2922 $8,167,2173 $7,840,000
Difference To Children ($/%) ($3,263,517)(40.0%) ($162,925)(2.0%) - ($327,217)(4.0%)
Amount To Charity $0 $0 $0 $1,200,000
Total Wealth Controlled $4,903,700 $8,004,292 $8,167,217 $9,040,000
Difference In Total Wealth Controlled ($/%) ($3,263,517)(40.0%) ($162,925)(2.0%) - $872,78310.7%

  1. Assumes that the donors die at the end of the 10 years without doing any other planning. The children enjoy the benefit of stepped up basis and therefore are not required to pay any capital gain taxes upon the sale of the real property. Includes 45% of the future value of the after tax rent (60%) received under the lease for the property in the sum of $120,000 per year for 10 years.back

  2. Assumes that the "lost opportunity cost" due to the payment of the gift taxes is 45% of what the future value of the growth of the gift taxes would have been if they had not been paid as of the date of the gift. Includes 45% of the future value of the after tax rent (60%) received under the lease for the property in the sum of $120,000 per year for 10 years.back

  3. Ibid.back

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