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- Estate Planning Basics
- Fundamental questions
- Will or living trust?
- Other facts about estate settlement
- Determining potential estate taxes
- Estate Tax Saving Strategies
- The marital deduction
- Life Insurance
- Annual gifting
- Charitable contributions
- Strategies for family-owned businesses
- Special strategies for special situations
- Community property issues
- Implementing and Updating Your Plan
- Where do you go from here?
- Estate planning worksheet
- Planning Levels Fee Schedule
If you share your estate with charity, it will cut your estate tax bill. Direct bequests to charity are fully deductible for estate tax purposes. Leave your entire estate to charity, and you’ll owe no estate taxes at all. In addition to tax advantages, contributing to charity is a good way to leave a legacy in your community or to instill in your heirs a sense of social responsibility. But what if you want to make a partial bequest to charity and a partial gift or bequest to your natural beneficiaries? A trust can be the answer.
Provide for family today and charity tomorrow with a CRT
Your will can create a trust that will pay income to beneficiaries you name for a period of time. At the end of the stated period, the remaining trust assets pass to your charitable organization(s) of choice. This is a charitable remainder trust (CRT).
For example, let’s say you want to make sure your elderly father is provided for after your death. Income from the trust created upon your death goes to him until he dies. At that time, the remainder passes to charity. You get what you wanted — you provide for both your father and charity. And, since you are making a partial charitable donation at the time of your death, your estate receives a deduction for a portion of the trust’s value. Government tables determine the size of the estate tax deduction based on the value of the trust assets, the trust term and the income to be paid to the beneficiary. The value of the income interest given to the noncharitable beneficiary is a taxable gift.
Take the reverse approach with a CLT
Now let’s reverse the situation. You wish to provide income to a charity for a set period after your death, with the remainder passing to your beneficiaries. The charitable lead trust (CLT) provides such a vehicle and also a partial charitable deduction for your estate.
Gain an income tax deduction with lifetime charitable gifts
You can use the above techniques during your lifetime as well. And if you create a charitable trust during your life, you may be entitled to an income tax deduction for the portion that government tables calculate to be the charitable gift. This way, you can reduce both your income and estate taxes.
The benefits are even greater if you fund the trust with appreciated assets. Let’s say you transferred appreciated securities to a CRT. After receiving the stock, the trustee sells it and reinvests the proceeds. Because a CRT is tax exempt, no capital gains tax is owed. The trustee is able to reinvest the proceeds in a higher yielding investment, thus increasing the annual cash income to you or your chosen beneficiaries. (The income distributions are taxable.) See Planning tip 6 for more ideas on incorporating charitable giving into your estate plan.