Case Studies and Articles

Tax Free Assets?

Tax Free Assets?


Tax Free Assets?

Unconventional Control of Family Assets

Vaughn W. Henry

 Unconventional maybe, but for sure this is an effective and powerful means to re-exert control over assets that would otherwise be lost to unnecessary taxation.

For those client/donors who already make significant donations and who may not be able to make full use of the charitable deductions, consider how the Lead Annuity Trust (CLAT) might be a useful alternative. If the purely philanthropical tools don’t motivate the client, consider this as an advanced estate and financial planning strategy designed to effectively pass assets down to heirs. An added benefit is that it maintains control of the social capital generated by the family when a family foundation is built into the final plan.

A reciprocal trust arrangement to the more popular Charitable Remainder Trust(§ 664 CRT), the Lead Trust is created under IRC §170 (f)(3). The major difference is the lead trust is a taxable trust providing periodic payments to a charity with the remainder either passing back to the donor or on to the donor’s heirs.

Why does this work well for some families intent on passing assets down more efficiently? Discounting and control. For example, a $3.03 million piece of farmland that generates 5.09% annual income but is expected to appreciate significantly because of location is already an estate tax liability just waiting to happen for many families. One possible scenario that employs efficient tools for conserving and passing value incorporates a Family Limited Partnership (FLP) and a non-grantor CLAT. The farmland is transferred into the FLP and the 99 limited partnership units are passed into the lead trust. The net effect, with a 30% discount typically attributable to unmarketable minority assets in a FLP, is the CLT receives income generating assets valued at $2.1 million. By passing out 7.25% of the initial value of the trust annually to the family’s charitable foundation or donor-advised fund in the local community foundation, the heirs will receive the discounted farmland valued in the trust at just $605,766 by deferring possession for 16 years. This value is less that the donor’s unified credit, and so the transfer avoids estate tax through a double discount strategy. At the same time, remember that the land is also appreciating at 6% inside the CLT and so it passes to the heirs without additional taxation at a value of $7.62 million. (There are some wrinkles if A FLP is used, generally a CLAT has to be rid of any ongoing business entity within 5 years or Excess Business Holdings may trigger unfavorable tax treatment. In this example a 2 trust CLAT, one holding FLP units and another holding land and securities, would be more likely to succeed.) What’s the cost? A deductible contribution to charity. In this case, $38,062.50 paid quarterly to the family’s foundation can be distributed to further advance the family’s values and charitable legacy while still passing assets to heirs efficiently. If the appreciating farm could be passed without paying any estate taxes, would a family give up the right to the income earnings on their farmland? Follow the math below. Questions? Check with our office for design options and suggestions.

Typical Plan


Initial Value

$3.03 million

$3 million

Family Value

$3.03 million

LP of $2.1 million

Yearly Transfer to Charity



Total Paid to Family Charity



Annual Income Earned & Taxed


less 31% tax

LP earns $152,700

offsets deduction = $0 Tax

Land Value in 16 Years @ 6%



Estate Tax Due @55% on Land



Net Heirs’ Value



Social Capital Controlled



© Henry & Associates 1998, 2000