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Monday, April 29, 2024
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Case Studies |
The FLP/CLT Bailout
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Case:
James Kestrel was in the process of transferring ownership in his stake of Printing Shop, Inc. After weighing his options, he decided that the Charitable Bailout Plan was an excellent way for him to transfer a third of his shares to his cousin, Ruby, while still providing his wife and charity with substantial benefits. James now had to determine the best way to transfer his remaining shares in Printing Shop, Inc., to his children. The value of James' remaining shares was approximately $1.2 million. Unfortunately, James had used his entire exemption equivalent six years ago when he made very large gifts to his four children. Therefore, he needs a plan that will allow him to transfer his shares to his children, and eliminate or greatly reduce the tax burden associated with such a transfer.
Question:
How can James transfer $1.2 million worth of stock to his children and pay absolutely zero gift or estate tax?
Solution:
James's attorney suggested the use of a "Double Discount Lead Trust Plan." This plan would incorporate both a Family Limited Partnership ("FLP") and a Charitable Lead Trust ("CLT"). The first step would be to transfer James's $1.2 million worth of shares into a FLP. Soon thereafter, the FLP would transfer the limited partnership units (i.e., 99%) to the CLT. Due to the lack of control and lack of marketability, a valuation discount is permissible when valuing the FLP units. Based upon an expert appraisal, James took a 30% discount, thus reducing the value from $1.2 million to $840,000. At this point, James funded the CLT with an asset worth $840,000. The next step is to determine the CLT payout.
It is important to recall that the FLP has assets worth $1.2 million. Furthermore, the shares have a total return of 8% each year. Therefore, the FLP is generating $96,000 per year. The assets in the CLT can thus continue to payout $96,000, since the CLT receives the FLP income. However, because the CLT is valued at only $840,000, a $96,000 payout is an 11.43% payout rate. This high rate generates a very large gift tax deduction. In fact, James is able to "zero out the tax" with his CLT in a mere 12 years. The "Double Discount" allows James to transfer all of his shares in Printing Shop, Inc., to his children in 13 years with no gift or estate tax liability. In addition to this wonderful benefit, his favorite charity receives over $1.2 million. Thus, James in effect gave his $1.2 million twice - once to children and once to charity. As you can imagine, James is truly thrilled with his "charitable bailout" plan.
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