Giving and Receiving: Making Greater Charity Contributions Possible Through Decreased Tax Obligations

By: Randy Fox
Firm Name: InKnowVision
Contact: Randy@inknowvision.com
Location: Naperville, IL
Industry: Tax Consulting

Quick Read
Larry and Marge Borden are 81 and 78 respectively, and both have grown children from prior marriages. Because this is a second marriage for both of them and their children are successful on their own, the Bordens want to leave just $2M total to the heirs and the rest of their wealth to three or four public charities when they die. This would not be unusual except for the fact that their net worth is currently $71M. Equally unusual is the tax burden. Whereas most high net worth individuals struggle with estate tax liabilities, the Bordens' biggest concern is high income taxes, largely due capital gains. Since their current annual income is close to $4M they pay nearly $850K each year in income tax.  This trend is expected to coincide with the rapid increase in the value of their investments each year.

Challenge
While the net worth of the couple is very high, nearly a quarter of their yearly income goes to pay their income taxes. The couple is extremely charitable but because they are not interested in giving up control of their assets while they're alive, they cannot make an outright gift to charity. By implementing a new estate planning strategy we will help the couple retain asset control, reduce income taxes, and establish a more lucrative gifting program for their favorite charities.

Design
Because the Bordens are not interested in giving up control of their assets during their lifetime, an outright gift to charity is not an option. Instead, they will need a well-developed strategy that allows them to achieve a few different objectives, including:

·         Giving the maximum amount to charity

·         Eliminating the burden of income taxes

·         Maintaining control of personal assets

The new estate plan that we developed included a number of steps which helped the client to establish a means of achieving all of their goals and more:

1. Established a Charitable Family Limited Partnership (CHARFLIP) specifically structured to produce minimal valuation discounts
2. Transferred $10M of marketable securities to CHARFLIP in exchange for limited partner (LP) and general partner (GP) interests
3. Appraised partnership units and received only 20% discount
4. Gifted all LP interests ($8M value) to favorite charities for $8M tax deduction over the next five years
5. Established intent to distribute 1% of CHARFLIP assets to charities with LP interests

Results
With these recommendations we were able to gift two years' worth of income to charity immediately and provide the catalyst for securing more than $350K annually in tax savings. The CHARFLIP will distribute more than $1.4M to designated charities during the couple's lifetime and, at their deaths, will transfer the balance to the same charities in the total of an estimated $17M.

Lessons Learned

·         Arrange for accelerated charitable giving to receive tax benefits

·         Creative estate planning increases initial distribution forecasts

·         A well-developed strategy does not compromise asset control

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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