The charitable limited partnership (CLP) is an estate planning tool that combines the use of a family limited partnership (FLP) with a gift to charity. The CLP may be used as an alternative to a charitable remainder trust, private foundation or supporting organization. Consider a CLP if you are charitably inclined and own highly appreciated assets over which you want to maintain control while providing an income stream to your family. Through the use of a CLP, you can achieve income tax savings, pass wealth to the next generation, diversify assets and serve a charitable purpose.

To use a CLP in your estate plan, you contribute assets to a limited partnership in exchange for a small number of general partnership units (such as one or two) and a large number of limited partnership units (such as 98 or 99). The partnership is generally set up for a term of 50 to 99 years. You retain control of the CLP (and its assets) through your ownership of the general partnership units. You then contribute a small number of limited partnership units to a trust (which may be an irrevocable grantor trust) established for the benefit of your children and donate the remaining limited partnership units to a public charity.

Getting the Most For Your Money

The CLP arrangement offers several benefits. First, minority and marketability valuation discounts should be available to the interests given to the children, resulting in a lower gift tax cost. Second, you receive an income tax and gift tax charitable deduction for the value of the assets contributed to charity.

Perhaps the most valuable benefit is that after the CLP is established and most of the limited partnership units are transferred to the charity, the CLP may sell the highly appreciated assets. The income tax result is that most of the capital gain is allocated to the charity partner, which pays no capital gains tax. Therefore, while annual distributions are made to the partners, it is not necessary to make large distributions so that the limited partner can cover his or her tax cost. You are liable only for the remaining capital gain that flows through to you from both your interest in the CLP and your status as grantor of the grantor trust established for your children.

Exploring Your Options

As donor, through the general partnership units, and pursuant to fiduciary duties as a general partner, you may reinvest the proceeds without being subject to the investment and self-dealing restrictions imposed by private foundation rules. You can incorporate a variety of additional planning options into a CLP that may achieve additional tax benefits. Some of these techniques may involve additional risk.

One variation involves providing the limited partners with the right known as a “put” to sell their interests to the partnership at a fixed point in time pursuant to a formula relating to fair market value. The formula often is at a discount from fair market value. The advantage to the charity exercising its put right is that it will be able to cash in on the gift it received and control its own funds. The result is that you and the trusts for your children are now the only owners of the partnership. The value of these remaining partnership interests will increase by the amount that the charity’s partnership interest is discounted upon the sale. For example, if your children own three units of the partnership and you own one unit, then your children will in effect receive three-fourths of the increase in the value of the partnership attributable to the sale.

Unrelated to whether a put right is granted to the charitable partners, your adult children may be able to obtain additional benefits from the CLP by receiving a fee for managing the partnership. Any such fee would need to be reasonable, based on comparable fees charged by managers in similar arms-length transactions. Even a management fee of 1% or 2% could result in the transfer of substantial additional wealth to your children over the 50- to 99-year CLP term.

Is a CLP Right for You?

If you are charitably inclined, a CLP is yet another estate planning alternative that you should consider when determining how to achieve your goals. Remember, as with all other estate planning options, no one plan fits every situation. If you have any questions or would like to discuss the CLP in more detail, please contact us. We would welcome the opportunity to help you reach your financial goals.

Pluses and Minuses of the CLP Minority Discount