charitable freeze

Follow-up to “Charitable Freeze” piece: understanding “discounts”

My last piece (click here)  on the so-called “Charitable Freeze” plan got so many viewers that I think we need a short follow-up.  These types of complexities even cause me to glass over so getting the basics down first will help everyone understand the plan.

The key to understanding the Charitable Freeze is “discounts” – a term of art, of course.  “Discounts” is a term that is used commonly in an estate planning/gifting context.  In short, it is method for transferring assets at reduced values for reporting purposes.

Typically, planners will use a 30% discount when transferring assets/shares that are held in an entity (LLC, LLP, etc…)  that entitles the transfer-or (i.e. rich parent) to claim that the assets/shares are worth less for “lack of marketability” and “lack of control”.

In other words, the recipients (i.e. kids) receive shares from an LLC or LLP – which are really worth the face amount but they have no ability to sell because good old dad holds those strings as the general partner or manager of the entity.

So, that $1 million in UPS stock that Mrs. Petter just put into her LLC, and then transferred the shares to her daughter gets reported as a $700,000 gift to her daughter (not the real value of $1 million).

Back to the Petter Case which confirmed that the Charitable Freeze works (for now).  Mrs. Petter took a 51% discount!  On the same $1 million example, she would only report a $490,000 gift to her daughter – nice deal for Mrs. Petter.

Taking a 51% discount is clearly a case of egging on the IRS to do battle.  The so-called safe harbor (i.e. not likely to be challenged) is 30%.

My experience – and I am guessing the far majority of world – is that people do not like to go into financial plans knowing that it is highly likely that for the plan to succeed, it will need extraordinary amounts of LITIGATION!

So, back to the Petter Case and the Charitable Freeze.  The Petters’ planner put in place an extremely aggressive discount – with a clause that prevents the IRS from actually collecting any more tax dollars should the IRS defeat the excessvie discount taken (funds going to charity instead – like a retroactive gift to charity that kicks in when the IRS beats you in court).

It may have paid off, but I wonder how much was spent in the litigation.  And, just because they won, doesn’t mean others will and it doesn’t mean that the IRS will back off challenging aggressive discounts.

So, the verdict on Charitable Freeze is: buyer beware!

“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 (, 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….