Charitable Remainder Trusts ("CRTs") are irrevocable trusts that divvy up the benefits of the assets they hold between income beneficiaries - you, your spouse and possibly your kids - and one or more charities you select to receive the assets after all the income beneficiaries die.
A typical scenario would have you contribute your corporate stock or rental property to such a trust which later sells it and, as a tax-exempt entity, escapes capital gain taxes altogether. (Had you sold the property, you would have incurred a Federal tax equal to 20% of your gain.) The proceeds are reinvested and managed by a trustee, who might be an independent person or institution or might in fact be you.
Along with the other income beneficiaries, you get to receive some or all of the trust's income for life and then the assets are distributed to the charities you identified. In the meantime, the trust will have grown tax-free, enriching all the beneficiaries to a much greater degree than would have been the case had taxes been paid on all the trust's earnings. And, since a CRT is "outside of your estate" for Federal estate tax purposes, your family may save as much as 55 cents of every dollar you move to your CRT.
As good as all that sounds, some creative planners are building on the CRT concept to make it work even harder. One such example is the Philanthropic Limited Partnership ("PLP").
In a limited partnership, there are two kinds of partners, one or more "general partners," who manage the assets or business, and one or more "limited partners," who don't. The family limited partnership has adapted the form to meet the special objectives of family members - to shift income to the junior generation, to distribute income or not as childrens' and grandchildrens' needs require, and to transfer future appreciation to younger family members so that income and estate taxes can be deferred. The April, 1999 "Lane Report" describes just how powerful a wealth-building tool the family limited partnership can be.
A PLP marries the CRT and the family limited partnership.
Here's a typical design. There are three partners in a family limited partnership - Dad who has contributed his highly appreciated business or other assets to the partnership in exchange for a 98.9% limited partnership interest; Junior (or maybe Skippy, a couple of generations down the family tree) who owns a .1% limited partnership interest; and a newly created family-owned corporation or limited liability company which owns a 1% general partnership interest. Dad then turns around and gifts his interest to a charity which now becomes a 98.9% limited partner.
The tax and economic consequences can be extraordinary.
First, Dad is entitled to a tax deduction for his gift. That gift is treated as a "present interest," yielding a much bigger tax saving than the gift of a "future interest" into a typical CRT.
The PLP will grow its wealth 98.9% tax-free. Both the family and the charity will have the immediate benefit of an income stream. And the value of the PLP's assets will safely remain outside Dad's eventual taxable estate.
Unlike a CRT, the PLP is not irrevocable. The family will retain control over the PLP's assets - and maintain the flexibility it needs over the generations the PLP will last.
The PLP affords the wealthy family an unprecedented opportunity for both multi-generational financial planning and philanthropic generosity. It deserves your consideration.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.