Sometimes Success is Penalized!

All too often these days, it seems that success is penalized. The entrepreneur comes up with the idea, takes significant risks in launching a business enterprise, fields off competitors, and then works countless hours for several years building the model, the cash flow, and the brand. He or she is finally at the magic point at which a sale of the business will produce a significant return. Only, because the entrepreneur started with almost nothing, his or her tax basis in the company is virtually nothing. A big tax bite on the capital gain seems inevitable.

Sophisticated Help for Those Who Are Philanthropically Inclined

There may be some alternatives to the big tax bite. One that may work well, particularly for entrepreneurs that are philanthropically inclined, is the charitable lead annuity trust (“CLT”). It sounds sophisticated; it is. But CLTs can also produce some very sophisticated results.

Charitable Lead Annuity Trust: What Is It?

Generally speaking, a CLT is a type of irrevocable trust that makes payments to charity for a specified time period (crafting that time frame involves the weighing of a number of factors), after which the balance in the trust either reverts to the trustor/settlor or passes to (or in trust for) other individual beneficiaries, such as children and grandchildren. Estate planning attorneys sometimes refer to CLTs as “wait a while” trusts, since the final beneficiaries wait a while before receiving the full benefit of the principal.

Benefits of a Charitable Lead Annuity Trust

For an entrepreneur who is naturally unwilling to part forever with assets that have been so carefully created, a transfer to a CLT, if properly drafted, can:

  •  Allow the entrepreneur, via a “grantor CLT,” to offset capital gains with a nice tax deduction in the year of the sale, and pay the bulk of the capital gain taxes owed over several years. This amounts to income averaging. Because of special provisions found in IRC § 7520, a grantor CLT can be much more effective than some other forms of remainder trusts. Yet, like the remainder trust, the CLT allows the entrepreneur to reclaim most of the property when the trust terminates.
  •  Allow the entrepreneur, via a “non-grantor CLT,” to pass assets down a generation to children – or even skip a generation to grandchildren – at little or no gift tax cost.
  •  Maneuver around existing percentage limitations on income tax charitable deductions where the entrepreneur is already giving substantial amounts to charity and, therefore, cannot fully deduct additional gifts.

Does Your Estate Plan Have Room for a Charitable Lead Trust?

While great care must be taken in structuring a charitable lead trust, such a vehicle can accomplish a number of important objectives for the individual or entrepreneur who is facing what investment counselors refer to as “a liquidity event.” Experienced legal counsel is a key to a successful plan. CKB VIENNA LLP has a long history of representing clients in all phases of wealth management and estate planning. We would be honored to assist you, and can help you to achieve your long-term goals. Our team takes the time to understand your goals and your long-term needs. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone at 909-980-1040, or complete our online form.