Case Study

Case: John and Mary Jones own a strip mall that they purchased a number of years ago for $400,000. The property is currently valued at just under $2 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 $12 million; therefore, they are in a high estate tax bracket. The San Diego Rescue Mission has launched a major facility expansion initiative, and John and Mary 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 the Rescue Mission?

Solution:

In consultation with the Rescue Mission Gift and Estate Design services team and their attorney, John and Mary transfer assets valued at $2.0 million plus to a family limited partnership. He selects a mix of liquid property and the strip mall with its fixed payment lease. Under appropriate Treasury and Tax Court guidelines, the appraiser determines a 35% discount for lack of marketability and lack of control. Harold then transfers the limited partnership interests with their discounted value into an 8% Annuity lead trust.

The Annuity Lead Trust, will pay income to the Rescue Mission for 10 years. After 10 years, the family limited partnership will be transferred to the children.

The results of this transaction are the following:

1. The San Diego Rescue Mission 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. Harold has leveraged the modest use of his gift tax exemption. He has multiplied the value of what he is transferring to his family many times beyond what could have been accomplished with just the Lead Trust.
3. Assuming the property appreciates by 3%  per year (projected inflation rate), after 10 years, when the children receive it, the property will be valued at well over $2,000,000. The appreciation on the property will be completely free of additional gift and estate taxes.

As you can see, the combination of a Family Limited Partnership and a Lead Trust is an excellent vehicle for fulfilling a pledge to the Rescue Mission and then benefiting family.

For further information and assistance, please contact Steve de Graaf in our Gift and Estate Design Services office.

Phone: 1-619-819-1758 (Steve de Graaf) or Email:

or complete our Confidential Reply Form

Write us: San Diego Rescue Mission, P.O. Box 80427, San Diego, CA 92138-0427