“Charitable Freeze” Technique?

If you are reading this blog, then you are probably looking for info on the newest techniques in charitable planning.  Thanks to Neal Myerberg (http://ce.columbia.edu/Fundraising-Management/Neal-P-Myerberg-Biography?context=603), who spoke to the masters group at New York city’s planned giving group (PPGGNY), we have new one to go over!

But, before you get too excited, I can already say it is not a very charitable plan (really, the heart of the plan is an “in terrorem clause” that is designed to cut out poor Uncle Sam should the ingrate successfully challenge Aunt Sally’s highly discounted gifts from her FLLC – all of this needing much explaining even to the more experienced planners).

Ok, what is the plan?

To understand this one (which I didn’t when Neal talked about it), I had to draw a picture with boxes and arrows.  It might help you if you draw your own based on what I am about to say.  Top of page, draw a box around Anne Petter’s name.  Directly under, with an arrow pointing down, draw a box for her Family LLC.  Next to that first arrow, write “oodles of UPS stock $?”  Then draw arrows from the Family LLC down to Donna and Terry Trust boxs (with $ to each next to lines).  Then draw two more lines down from the Family LLC box to two charity boxes.  Get the picture – even that didn’t help me much.

Here is what they did: they orchestrated a generational transfer from mother Anne to daughters Donna and Terry (into their trusts) that was linked to transfers to the two charities involved. The plan was drafted to maximize Anne Petter’s Federal lifetime giving exemption with discounted gifts to Donna and Terry of LLC shares.  But, if the IRS swooped in and said that their discount was too high, then anything that might get hit with gift/estate tax would automatically under the terms of the trusts go to the two charities negating any gift/estate tax.  So, if IRS wins, IRS still loses.  If IRS loses (like they did), well, they are losers, aren’t they?

Ok, I oversimplified as usuaul and I also assumed that you understand discounts (discounting means this:  put $1 million in an LLC, then the gift of the shares representing the $1 million.  They are only worth $700,000 because who would buy such shares of the LLC for $1 million – and deal with some controlling LLC manager – it is a legal fiction often used to pass more $ estate/gifts by lowering the fictitiously lowering the value.  30% is the typical discount thrown around).

This case actually focused on the estate/gift tax charitable deductions to the charities since they were tied to the success or failure of the discounted gifts to Donna and Terry’s trusts.  IRS focused on the contingent nature of the charitable transfers – as they were tied to the success or failure of the discounting of the gifts to the childrens’ trusts.  Court agreed with taxpayer, basically confirming for now that this very complex scheme is available for other to try.

Here is a link to the case:  Petter Charitable Freeze Case

My take, for now, is that this new deal is not worth much attention in the nonprofit world.  Sounds like the work of a overly aggressive and creative estate planner.  But, anything that likely requires a court battle to succeed is not something normal donors would want anything to do with.  Anyway, if I can’t figure what is really going on (and that is my job), it is hard to see fundraisers ever understanding it enough to even talk about it or donors getting it to the point where they would be willing to take accept the risks inherent in the plan.

If you read that case and can report back in a paragraph or two what I am missing, please, please comment….

One comment

Leave a Reply