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You say you'd like to pay less income tax, pass wealth to your children, diversify your assets and at the same time serve a charitable purpose. What's creative and efficient way to do all this?
One way is the charitable limited partnership (CLP). This estate planning tool combines a family limited partnership (FLP) with a charitable gift. A CLP may be ideal if you are charitably inclined and own highly appreciated assets you want to maintain control over while providing an income stream to your family. You may use a CLP as an alternative to a charitable remainder trust, private foundation or supporting organization.
How A CLP Works
To establish a CLP, you:
- Set up a limited partnership - generally for a term of 50 to 99 years.
- Contribute assets to it in exchange for a small general partnership interest (as little as 1%) and the balance as limited partnership units.
- Retain control of the CLP and its assets through your ownership of the general partnership unit.
- Establish a trust - which may be an irrevocable grantor trust - for your children's benefit.
- Contribute some of the limited partnership units to the trust - ideally a relatively small percentage.
- Donate the remaining limited partnership units to a charity.
The Basic Benefit
What are the benefits of a CLP arrangement? Can you save on both gift tax and income tax? Yes.
First, minority and marketability valuation discounts should be available to the interests given to your children. Second, you receive an income tax charitable deduction for the value of the assets given to charity. The value of your charitable gift also should be subject to minority and marketability discounts, resulting in a smaller income tax charitable deduction for you. But an IRS reduction of the discount on your gifts to your children for gift-tax purposes would increase your income tax charitable deduction by a corresponding amount.
Another benefit is that the CLP income portion that flows through to the charity limited partner will generally not be subject to income tax.
But perhaps the most valuable benefit is that after you establish the CLP and transfer most of the limited partnership units to the charity, the CLP may sell the highly appreciated assets. Most of the capital gains is allocated to the charity partner, which pays no capital gains tax. Although the partners can be given annual distributions, you as limited partner will need no large distributions to cover your tax cost. You are liable only for the remaining capital gain that flows through to you from both your interest in the CLP and perhaps your status as grantor of the trust established for your children, depending on how the trust is structured.
You, as donor, through the general partnership units and according to your fiduciary duties as a general partner, may reinvest the proceeds without being subject to the investment and self-dealing restrictions imposed on private foundations.
More Planning Opportunities
You can incorporate a variety of additional planning options into a CLP that may achieve additional tax benefits. Some of these techniques may involve additional risk.
In the "put" variation, the limited partners have the right to sell (put) their interest to the partnership at a fixed time under a formula relating to fair market value, often at an additional discount. A charity exercising its put right can cash in on the gift it received and thus control its own funds. As a result, you and the trusts for your children are now sole owners of what is left of the partnership. The value of these remaining partnership interests is discounted upon the sale and will be allocated proportionately to you and the trust(s) owning the partnership.
Another planning option is to have you, your adult children and then future generations manage the CLP. The family may be able to obtain additional benefits by receiving a reasonable fee in exchange for services. The fee must be based on comparable fees charged by managers in similar arms-length transactions. Even a management fee o 1% or 2% could result in the transfer of substantial additional wealth to your children over the CLP term.
Achieving Your Goals
As you can see, a CLP can be an excellent estate planning option for the charitably inclined that could help you achieve your goals. But other options might fit your particular situation better. You'll want to consider all possibilities so you can make an informed choice. We'd be happy to help you arrive at the best way to reach your estate planning goals.
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