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 Six: Founders Stock

(Intervivos, CLAT, and Non-Grantor)

A businesswoman is among the "founders" group of a company that was started a few years ago. Her stock currently represents about 19% of the outstanding shares of the common stock of the company and has an income tax basis of $0. The company is being groomed to go public relatively soon. The value of the donor's stock today has been appraised to be $4,000,000. This appraisal has taken into account the fact that the donor does not have a controlling interest in the company, and that the stock currently is not marketable. The value of the stock is expected to grow to about $16,000,000 in five years due to the IPO and the expected future operations of the company.

The donor and her husband are both age 55, and have two children who have completed college and are gainfully employed. The donor and her husband also have independently been involved as board members and as volunteers with several charities in their community. They have worked with their advisers and their children to develop a family financial plan.

The donor contributes one half of her stock ownership in the company ($2,000,000 in value) to a charitable lead annuity trust with a payout of 6% for 10 years with her children as the remainder beneficiaries. The gift to the children will be valued at $1,164,908, and the donor and her husband will use essentially most of their estate and gift tax exemption equivalent to shelter this gift. Just prior to the gift of this stock to the CLT, the company declared an annual dividend on the shares of stock that the donor subsequently gave to the CLT in the sum of $120,000 per year.

The annual CLT lead trust payments to the charities of $120,000 for 10 years result in total gifts to charities of $1,200,000 with gift tax savings of nearly $3,500,000 for the family comparing the CLT to a gift of the same number of shares of stock directly to the children in 10 years and after the IPO. In addition, the table below reflects a comparison of a direct gift by the donor and her husband to their children now with the children selling the stock at the end of the 10th year. In each of the three instances compared in the table below, it has been assumed that the children sell their stock of the company at the end of the 10th year.

Assuming that the children sell the stock after the termination of the CLT, the children will net $5,840,000 after the payment of capital gains taxes without, however, the payment of any gift or estate taxes. However, instead of selling their stock directly, the children could, obviously, establish charitable remainder trusts for their lifetimes and thereby avoid the reporting of the capital gains taxes at the time of the sale of the stock. The overall benefits in such a situation for the children and the charities obtained by using the CLT and the CRTs are very substantial.

This planning focuses on transferring wealth and not on saving capital gains taxes. It is very possible that the donor and her husband could establish a charitable remainder trust after the IPO for a portion of her stock holdings and thereby provide themselves with substantial income during their joint lifetimes and substantial benefits to their favorite charities after both of their deaths.

Financial Results:
  No CLT - Gift In 10 Years No CLT -- Gift Now CLAT
Asset Value Currently $2,000,000 $2,000,000 $2,000,000
Asset Value At End Of 10th Year $8,000,000 $8,000,000 $8,000,000
Federal Gift Tax $3,472,000 $280,000 $0
Capital Gain Taxes $2,160,000 $2,160,000 $2,160,000
Net To Children -- After Sale At End Of 10 Years $2,771,7401 $5,888,3752 $5,840,000
Difference To Children ($/%) ($3,068,260)(52.5%) $48,3750.8% -
Amount To Charity $0 $0 $1,200,000
Total Wealth Controlled $2,771,740 $5,888,375 $7,040,000
Difference In Total Wealth Controlled ($/%) ($4,268,260)(60.6%) ($1,151,625)(16.4%) -

  1. Includes 45% of the future value of the after tax dividends (60%) received on the stock 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 dividends (60%) received on the stock in the sum of $120,000 per year for 10 years.back

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