An option exists to use a Double Discount Lead Trust to accomplish ministry and estate-planning objectives. The Double Discount Lead Trust is a combination of a Family Limited Partnership and a Lead Trust.

The first step is to transfer assets to a Family Limited Partnership (FLP). Normally, there is a 1% general partnership interest and 99% limited partnership interest. In some cases, the limited partnership interests are gifted to family members. However, it is possible to get a second benefit by transferring the FLP units to a Lead Trust and subsequently to family members.

The double discount is first for the FLP and second for the Lead Trust. The value of the Family Limited Partnership units is reduced because of lower marketability and lack of control. There is a second discount in the Lead Trust for the present value of the distributions to charity. The Double Discount Lead Trust enables transfers of assets to family at very minimal gift or estate tax cost.

Case Study

Case: John and Mary Jones own a strip mall that they purchased a number of years ago for $250,000. The property is currently valued at $1 million and produces an income of $80,000 net per year. Also, John and Mary estimate that the property will continue to grow in value by the rate of inflation over the next 10 years. They do not need the income from this property and are interested in transferring this asset down to their children, but they are very concerned about the gift and estate tax consequences. Their combined estate value is $7 million; therefore, they are in the highest estate tax bracket. OMS International has launched a number of church-planting and theological training initiatives, and they wish to make multi-year pledge of $800,000.

Question: Can John and Mary transfer this asset down to their children with reduced gift and estate tax consequences and also fulfill their pledge to OMS?

Solution: In consultation with the OMS Gift and Estate Design services team, John and Mary decide to set up an 8% Annuity Lead Trust, funded with the strip mall, which will pay income to the charity for 10 years. After 10 years, the property will be transferred to the children.

The results of this transaction are the following:
 

1. OMS will receive $80,000 per year for the next 10 years, thus fulfilling John and Mary’s pledge of $800,000 to the capital campaign.
2. As a result of transferring the property to the trust, John and Mary will receive a current gift tax deduction of $611,000. Therefore, the net gift that will draw down their $1,000,000 lifetime gift exemption is only $389,000!
3. Assuming the property appreciates by 3% - 4% per year (projected inflation rate), after 10 years, when the children receive it, the property will be valued at $1,410,000. The appreciation of $410,000 will be completely free of additional gift and estate taxes.

As you can see, the Lead Trust is an excellent vehicle for fulfilling a pledge to OMS and then benefiting your children.

For further information and assistance, please contact Diane Arndt or Steve Hoffman of our Gift and Estate Design services team.

Phone: 1-317-881-6755 ext. 334 (Diane Arndt)

E-mail: shoffman@omsinternational.org, or darndt@omsinternational.org

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